Recent public market volatility appears to be chilling the once hot pipeline of initial public offerings (IPOs).
While the lower demand could yield “bargain” IPO prices for longer-term holders, it is all about valuation. Does a company really have great growth potential or will it fall flat?
As we’ve previously discussed on this blog, 2014 was a banner years for IPOs. Investors risked more than $248 billion in the worldwide IPO and venture capital markets last year, with technology companies leading the pack. In 2015, the pace has slowed considerably, particularly in the technology sector.
Seven year low in IPO tech involvement
So far this year, just 11 percent of U.S. IPOs have involved tech companies, according to Renaissance Capital’s latest data. The figure represents a seven year low. Businesses that have recently gone public are also experiencing slumping stock prices.
As The Wall Street Journal recently highlighted, there is no shortage of private technology companies with sky-high valuations. Venture capital firms currently value nearly 120 private companies, including big names like Uber Technologies Inc. and Airbnb Inc., at $1 billion or more, which represents twice as many as in 2014. The ride-hailing and home rental companies are also both expected to see revenue grow significantly this year by up to 400 percent.
While private fundraising remains strong, investors and start-ups appear to be taking notice of the changing public market conditions, which have been volatile thanks to the prospect of rising interest rates and growing concerns over China’s economic slowdown. There are currently very few billion-dollar IPOs in the pipeline for the remainder of the year.
The steady influx of cash is one reason why many tech start-ups can afford to stay private. Rather than pursue an IPO with uncertain success, investors are exhibiting patience and allowing companies to expand and strengthen their businesses outside of the public markets.
Learning from example
Investors and start-ups are likely also leery given the limited success of IPOs over the last year. As reported by The WSJ, the stock prices for at least 10 U.S. companies that have gone public since 2014 have dropped below their last private market valuation. Investors in tech companies have also failed to realize profits if they did not exit soon after the close of the IPO. For instance, shares of Alibaba Group Holding Ltd. dipped below the IPO price in August and are down nearly 39 percent in 2015. Online retailer Zulily Inc., which entered the market in 2013 at $22 per share, was recently acquired by Liberty Interactive Corp. for $18.75 a share. Of course, there are many that have done well, and held their gains, and most stocks respond to the ups and downs of the market. Given the recent market volatility, we can anticipate that trading price sensitivity to the generally unsettled conditions to continue for companies that recently completed their IPOs.
It remains to be seen how the IPO slowdown will impact start-ups and development stage companies that are looking to raise capital privately. We will be closely monitoring these trends and will post updates as they become available.
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Will Weakening Markets and Slumping Stocks be the End of the Tech IPO?
Author: Dan Brecher
Recent public market volatility appears to be chilling the once hot pipeline of initial public offerings (IPOs).
While the lower demand could yield “bargain” IPO prices for longer-term holders, it is all about valuation. Does a company really have great growth potential or will it fall flat?
As we’ve previously discussed on this blog, 2014 was a banner years for IPOs. Investors risked more than $248 billion in the worldwide IPO and venture capital markets last year, with technology companies leading the pack. In 2015, the pace has slowed considerably, particularly in the technology sector.
Seven year low in IPO tech involvement
So far this year, just 11 percent of U.S. IPOs have involved tech companies, according to Renaissance Capital’s latest data. The figure represents a seven year low. Businesses that have recently gone public are also experiencing slumping stock prices.
As The Wall Street Journal recently highlighted, there is no shortage of private technology companies with sky-high valuations. Venture capital firms currently value nearly 120 private companies, including big names like Uber Technologies Inc. and Airbnb Inc., at $1 billion or more, which represents twice as many as in 2014. The ride-hailing and home rental companies are also both expected to see revenue grow significantly this year by up to 400 percent.
While private fundraising remains strong, investors and start-ups appear to be taking notice of the changing public market conditions, which have been volatile thanks to the prospect of rising interest rates and growing concerns over China’s economic slowdown. There are currently very few billion-dollar IPOs in the pipeline for the remainder of the year.
The steady influx of cash is one reason why many tech start-ups can afford to stay private. Rather than pursue an IPO with uncertain success, investors are exhibiting patience and allowing companies to expand and strengthen their businesses outside of the public markets.
Learning from example
Investors and start-ups are likely also leery given the limited success of IPOs over the last year. As reported by The WSJ, the stock prices for at least 10 U.S. companies that have gone public since 2014 have dropped below their last private market valuation. Investors in tech companies have also failed to realize profits if they did not exit soon after the close of the IPO. For instance, shares of Alibaba Group Holding Ltd. dipped below the IPO price in August and are down nearly 39 percent in 2015. Online retailer Zulily Inc., which entered the market in 2013 at $22 per share, was recently acquired by Liberty Interactive Corp. for $18.75 a share. Of course, there are many that have done well, and held their gains, and most stocks respond to the ups and downs of the market. Given the recent market volatility, we can anticipate that trading price sensitivity to the generally unsettled conditions to continue for companies that recently completed their IPOs.
It remains to be seen how the IPO slowdown will impact start-ups and development stage companies that are looking to raise capital privately. We will be closely monitoring these trends and will post updates as they become available.
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