Sandy Miller is a general partner at IVP. He co-founded investment bank Thomas Weisel Partners and served as a senior partner at Montgomery Securities.
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Sixteen months ago, I predicted 2017 would be “the best year for tech IPOs since the dot-com heyday almost two decades ago.”
Well, that was not exactly what happened — though 2017 was a good year for IPOs compared to previous years. Despite strong public markets, where we saw the NASDAQ jump 28 percent and the Dow by 25 percent — there were 59 VC-backed IPOs, which was an improvement over the 41 we had in 2016 (2018 NVCA Yearbook) — last year was far from the torrent I expected. One key reason was concerns by private companies that public valuations might not give private investors a solid gain. At the same time, there was abundant private capital for those companies, so IPOs were not critical for raising capital.
2018 IPOs are off to a strong start
The highly anticipated and successful IPO by Dropbox (DBX) in March and Spotify’s (SPOT) direct listing in April have put a spotlight on the U.S. tech IPO market. Four recent tech IPOs — Avalara (AVLR), Carbon Black (CBLK), Smartsheet (SMAR) and DocuSign (DOCU) — all revised the filing ranges upward, priced at or above the high-end of the new range, and are trading up an average of 79 percent since their debuts in late April through mid June. This is consistent with tech IPOs so far this year, which have traded up 92 percent.
Halfway through 2018, VC-backed IPOs in the U.S. have reached $6.9 billion, second only to 2012 when Facebook made its debut. I am feeling bullish about the IPO environment over the next 18 to 24 months, with some new factors that merit close attention. As IPOs take off, we will also see an acceleration of M&A.
So what’s in store for the rest of 2018?
We see a pipeline of later-stage companies with strong fundamentals, and pent-up investor demand for fast growth investments. The pipeline of later-stage companies seems larger than ever, and tech IPOs are the strongest among industry sectors so far this year — and at double the pace of last year, according to Renaissance Capital. High-profile companies like Lyft, Sonos, Eventbrite and Airbnb are all in various stages that signal they may go public.
When venture-backed U.S. technology companies go public, it opens the doors for others.
Valuations, though still sky-high in some cases, may not be a roadblock. Some people were worried about whether these companies could sustain the valuations and be able to achieve a strong exit. We have quite a few vivid examples of highly valued private companies that marched forward to an IPO and trade at levels giving good returns to their private investors.
More companies are starting to realize that it is a good time to go public. Even with some temporary pullbacks like Facebook after the Cambridge Analytica incident, Zuck and team went on to blow out first quarter earnings. The markets are still at great levels by historic standards.
A very strong exit environment is good for the VC ecosystem. When venture-backed U.S. technology companies go public, it opens the doors for others.
Strong IPO market will fuel M&A
Robust M&A and IPO cycles tend to flow together, and we seem to be riding that wave already. The last strong joint cycle was in 2014, which saw 124 IPOs and 941 acquisitions (NVCA).
The new tax laws have lowered corporate tax rates, encouraged repatriation of massive offshore cash held by tech companies and brought the cash positions of large tech companies up to the highest levels they have ever been. Not only will there be an uptick in the number of acquisitions, but in the size of transactions as large tech companies become active buyers. Salesforce’s $6.5 billion acquisition of MuleSoft, which had gone public last year, and Microsoft’s acquisition of GitHub for $7.5 billion, are good examples. Expect Amazon, Facebook, Google and Microsoft to continue to be active.
We are seeing a number of acquisitions of private tech companies that are realistic IPO candidates. The most vivid example of this was the acquisition of AppDynamics by Cisco last year for $3.7 billion, which was announced at the “11th hour” before what would have been a successful IPO by AppDynamics (which had completed its roadshow and was poised to price).
An IPO filing, even the prepping for an IPO, can serve as a catalyst for an acquisition. The big tech acquirers are tracking all the great young private tech companies, and when an IPO is imminent, it can motivate them into action to acquire a company that is a great strategic fit.
Just recently, Glassdoor was acquired by Recruit Holdings for $1.2 billion and Walmart bought 77 percent of Flipkart for $16 billion — either company could have gone public, but once companies are either on file and preparing for an IPO or make a confidential filing, it becomes a catalyst for potential buyers that have been tracking them for a while to make an acquisition.
Not only will we see acquisitions by the big technology companies, but more traditional-sector companies as well. For example, in October, General Motors acquired Strobe, a startup focused on driverless technology, building on its earlier buy of Cruise Automation. Walmart’s acquisition of Flipkart, the Indian e-commerce giant, is another example.
Technology opportunity follows public demand
Growing concerns about privacy and security have created a lot of interesting opportunities, and emerging companies in those sectors are achieving scale rapidly. We are seeing a lot of demand for companies using technology to solve cybersecurity issues; for example, Zscaler saw its shares more than double on its first day of trading back in March. 2018 is projected to be a strong year for cybersecurity IPOs, with companies like Cloudflare, Illumio and Lookout.
Startups now have more options, including remaining private.
We have seen this movie before — back in the early 2000s when the tech industry was climbing its way out of the dot-com bust, cybersecurity companies were among the first to gain traction, along with startups using technology to help Fortune 500 companies cut costs — an early standout was VMware, which pioneered server virtualization and was quickly gaining market share before it was acquired by EMC in 2004.
The current administration’s relaxation of the JOBS act has made the regulatory environment more benign than it has been for a long time, which could make things easier for companies to go public.
Larger private companies can now use the confidential filing provision of the JOBS Act that smaller tech companies have had access to over the last few years. The SEC is also proposing to allow the larger private equity companies to use the test-the-waters provision of the JOBS Act. These provisions dramatically reduce any perceived risk of a disappointing IPO.
New exit opportunities via private equity and direct listings
Startups now have more options, including remaining private. That said, times are even more interesting for private companies looking for liquidity. Private equity firms and sovereign wealth funds are coming into the game and buying up tech startups, thereby providing another exit opportunity.
Recently, Spotify turned heads with its unusual IPO by doing a direct listing. For companies that do not need primary capital and are already well-known by investors, the direct listing is a realistic option. For a company with these characteristics, the biggest reason a company would do a direct listing is to save on fees and redirect who benefits from the first day pop.
There is a lot of speculation whether more companies will choose a direct listing over the traditional IPO and how it impacts VC. I believe it is beneficial for the VC ecosystem as it is another way for companies to go public. However, I do not expect too many companies will follow the direct listing approach Spotify took, as they were in a somewhat unique position.
It’s exciting to see alternatives to the traditional IPO, and the second half of this year into 2019 will likely see a boom of IPOs. Going public enables startups to provide liquidity for employees and investors, as well as generate much-needed publicity and credibility, which in turn bring customers and revenue. It’s an exciting time to be in the technology VC space following a year of unexpected drama.
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