Last week, a flurry of tech companies unveiled plans to go public, with many more to come, including from those companies that have already filed their IPO paperwork confidentially.
Starting shortly after Labor Day, we’re going to see a socially distanced, Zoom-powered frenzy of new issues. Offerings are coming from some of the biggest private companies on Earth—Palantir, Airbnb, Ant Financial, DoorDash, Asana, Snowflake, and more. It’s going to be a long list.
Here are 10 things you need to know about the tech IPO boom:
Investors are ravenous. This summer’s IPO flurry has been hugely successful, with strong debuts for companies like
Warner Music Group
(ticker: WMG) and
(BIGC), a small e-commerce software company, which went public Aug. 5, is up almost 500% and now trades for more than 60 times this year’s expected sales. The
Renaissance IPO ETF
(IPO), which invests in recent new issues, is up 52% year to date.
Sandy Miller, general partner at Institutional Venture Partners, notes that the number of public companies has fallen in half over the last 20 years, as M&A has outstripped new issues. “There’s a real hunger for new names,” he says.
The supply is deep. Venture-backed unicorns—pre-IPO companies with valuations above $1 billion—are piling up like kindling. According to CB Insights, there are 490 unicorns. By contrast, there are just shy of 2,000 companies trading on the Nasdaq or the New York Stock Exchange with valuations above $1 billion. In other words, if all the unicorns magically listed at once, the number of large cap U.S.-listed companies would increase by 25%. Most but not all unicorns are tech businesses, so consider this: Over the past three years, there have been a total of 100 tech IPOs. The current supply of unicorns is equal to 14 years of tech stock debuts.
The cloud is working its magic. With so many people working and studying from home as a result of the pandemic, companies of every variety are shifting computing resources to the cloud. That’s driven up demand at almost every cloud business.
This past week brought better-than-expected earnings from
(INTU), and Hewlett-Packard Enterprise (HPE), all due to the cloud trend. The
Global X Cloud Computing ETF
(CLOU), which owns stocks like
(SHOP), is up 52% this year. IVP’s Miller says many private cloud companies lowered expectations at the start of the pandemic and are now outperforming those revised outlooks. That, Miller says, has emboldened private cloud companies to restart their push into the public market.
Opportunity abounds. Sure, the tech giants have bet big on the cloud, but unlike e-commerce, internet search, and smartphones, the cloud is a wide open market. “Cloud computing” is just a method for delivering software. It covers a lot of territory. Among the new IPO registrants are Snowflake, cloud-based data management; Asana, cloud-based work management software; JFrog, software release management from the cloud; and Sumo Logic, cloud-based analytics software.
Coming soon: Airbnb (cloud enabled short-term rentals) and DoorDash (cloud-enabled food deliveries.)
You want growth, here’s growth: Asana’s revenues were up 86% in the latest year. Snowflake grew 174%; JFrog, 65%; and Sumo Logic, 50%. (You want profits? Be patient.)
Marquee names. These aren’t two-kids-in-a-garage companies. Unity Software, which provides tools for creating videogames, is run by John Riccitiello, a former CEO of Electronic Arts, who also co-founded Elevation Partners. Asana’s founder and largest holder is Dustin Moskovitz, co-founder of
The largest investor in Palantir is Peter Thiel, who made a fortune as an early Facebook investor. And Snowflake CEO’s is Frank Slootman, who used to run
and Data Domain.
Direct listings are back… It’s been more than a year since
(WORK) direct-listed on the New York Stock Exchange, triggering widespread speculation that we’d see a flurry of copycats. But there haven’t been any others, reflecting the weak market performance of direct listers Slack and Spotify.
But the option to list without the dilution of an IPO is still tempting for companies that don’t need capital. Asana and Palantir are both direct listing, and more will likely follow.
…SPACs are in the picture… At some point, a unicorn or two could skip the IPO route and merge with a SPAC, or special-purpose acquisition company, those structures created with the specific mission of finding a company to buy. It worked for
(NKLA). Why not a Valley-based software business? IVP’s Miller thinks we’ll be seeing some Valley tech companies choose SPACs in the coming weeks.
...and auctions are coming. Lise Buyer, founder of Class V Group, an IPO consulting firm, says investment banks are itching to bring back the auction-pricing model used when Google, now
(GOOGL) went public in 2004. Buyer, who worked on the Google IPO team, says the auction model is intended to crush the IPO pop, when fat rewards from first-day IPO spikes go to institutional investors, rather than the company. She thinks the auction model is returning, and soon.
Timing is everything. Buyer notes that there’s an annual IPO push right after Labor Day, as companies try to close deals before the holidays.
Buyer doesn’t think the coming election is a major factor, but she says that if issuers are worried about the outcome, there’s logic in getting out the door now, while stock prices are high and investors are in a buying mood. It won’t last forever.
Write to Eric J. Savitz at email@example.com