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THE IPO is dead, long live it Initial Public Offering. When the pandemic struck in March, initial public offerings, especially those from tech startups, are expected to be among the first victims. After all, who wants to go public in a once-in-a-century crisis?
It turns out a lot of people. In the last two months Initial Public Offerings, which almost dried up until the end of May, returned with a vengeance to America. None of the recent and upcoming announcements from Silicon Valley rival that of Ant Group. The payments subsidiary of online giant Alibaba wants to raise a record $ 30 billion in China by October, which could value the company at around $ 200 billion. But U.S. tech startups have made $ 10 billion so far this year (see Chart 1) – and there’s more to come. On August 19, Airbnb, which rents homes to travelers, filed an application Initial Public Offering. Other private “unicorns” that would be ready for public pasture include Snowflake Computing, which makes cloud software; DoorDash, which delivers food; and Instacart, which delivers groceries. Add Palantir, an encrypted data management company gearing up for a direct sale of existing shares on the public markets, and the latest combined valuation of those five is $ 80 billion, according to Pitchbook, a data provider. Even if they only float a portion of their stocks, billions of fresh tech stocks will soon be publicly traded.
This wave of activity did not reach dot-com bubble territory from the turn of the century, when dozens of startups floated each month. But there is a smell of “irrational exuberance” in the air, detects Lise Buyer, who has been monitoring tech stocks since the late 90s and now helps startups get started. Initial Public Offerings in class V Group, a consulting firm. When Duck Creek, an insurance technology company, went public on Aug. 14, it closed nearly 50% more. BigCommerce, an online shopping platform that floated a week earlier, saw its shares “pop” by over 200%.
With the S&P 500 index of large US companies at an all time high, not to mention the fact that covid-19 is raging, investor rationality is certainly up for debate (see Buttonwood). But for many startups, the desire to go public is perfectly rational, for two reasons.
The first concerns the financial markets themselves. Venture capitalists who had invested billions in unlisted companies began to calm down on frothy startups before the pandemic, after a few lists of unicorns disappointed (Lyft and Uber) or collapsed (WeWork). At the same time, lower interest rates push public capital to seek returns. As a result, equity investors are prepared to accept high valuations, says Lauren Cummings of Morgan Stanley, an investment bank and a major underwriter of Initial Public Offerings. “There is insatiable demand from public investors,” acknowledges Brian Feinstein of Bessemer Venture Partners, a venture capital firm (YOU) business.
Startups are keen to shut it down before it wears off. Many companies are therefore dusting off the listing plans that were suspended following the hiccups and the WeWork snafu. Their case is reinforced because – and this is the second reason startups are lustful – the pandemic has been a boon for many tech companies.
Alphabet’s Big Five – Google, Amazon, Apple, Facebook, and Microsoft – have thrived as self-isolated consumers spend more time and money online and businesses move into cloud services computing to allow remote work. On August 19, Apple briefly touched a market cap of $ 2 billion, the first U.S. company to do so. Not-so-great tech has also benefited, including many companies that have recently gone public.
The pandemic has highlighted and accelerated a fundamental shift towards digital businesses, says Sarah Cannon of Index Ventures, a YOU strengthen. The trend will last for decades, she predicts. The markets agree. The technology-intensive renaissance Initial Public Offering The index, which includes most listeners for the past two years, has risen by more than 40% since January (see graph 2). Zoom, whose video conferencing app has become ubiquitous amid lockdowns, has seen its share price quadruple since its introduction in April 2019; it’s worth $ 78 billion. CrowdStrike, a cybersecurity company listed in June of last year, has quadrupled in value since March.
One thing the last boom did was highlight how successful startups YOU companies have grown with the current process of going public. It’s cumbersome, with lots of paperwork, and can take over a year. It’s also expensive and considered too comfortable for Wall Street. Investment bank fees alone absorb between 4% and 7% of a Initial Public Offeringthe proceeds of the sale, not including lawyers and other advisers. Startups and YOU companies are flagging day one big pops as evidence that deals are being dumped to give big bank investors a quick return. After all, these clients are regulars who have to be nice, whereas most startups only go public once.
Disaffection with the Initial Public Offering The process, combined with a renewed desire to go public, has led some companies to consider alternatives. One is a “direct list” of the kind Palantir pursues, and which Spotify, a music streaming service, and Slack, a corporate messaging company, have used successfully. Asana, which sells web-based project management software, could be another unicorn to go the direct route. Direct listings use an electronic exchange auction to get startups a fairer price for their stocks than investment bankers. But they don’t allow companies to raise new funds. As a result, they are only an option for cash-rich businesses.
Another avenue that has gained prominence is the Special Purpose Acquisition Company. These SPACs, as they are called for short, are shell companies that go public and promise to buy one or more private companies with the proceeds from the listing. The private company then fills the listed shell with a reverse merger. SPACs have a questionable history; many have underperformed the broader stock market. But the latest batch promises to fix the loopholes while preserving the benefits, which include direct purchase price negotiations that can make transactions faster and more predictable. January to early August 60 SPACs went public, raising $ 22.5 billion. In July, Bill Ackman, a hedge fund boss, launched a $ 5 billion to $ 7 billion vehicle, the largest to date.
It is not known whether Silicon Valley will adopt SPACs wholeheartedly. The biggest tech company to ever use one is Nikola, a secret zero-emission truck start-up that now boasts a market capitalization of around $ 16 billion. Many entrepreneurs and their funders would resist letting their businesses get sucked into a shell. But SPACs have a place in the world of technology. On August 18, Kevin Hartz, one of the early investors in Airbnb and Uber, launched one. Ribbit Capital, a YOU company, is planning another.
the Initial Public Offering-the industrial complex is not opposed to direct registrations or SPACs, although they are less lucrative than the old-fashioned methods. Bankers are predicting a diverse future with increasingly tailored IPOs that, for example, target specific investors and determine in advance how long staff should hold their stocks. As Greg Chamberlain of JPMorgan Chase, a bank sums it up, “Not all technology companies are the same. They have different goals. As long as startups want to cash in, as all ultimately do, they’ll need Wall Street to guide them.■
This article appeared in the Business section of the print edition under the headline “Party like it was 1999”
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