Where have the tech IPOs gone?
Recently, it's been nothing but crickets in cyberspace
There’s plenty of activity in the tech startup world, except at the top: That rock star of exits – the initial public offering – has left the building.
For much of 2015 and 2016, there were nothing but crickets chirping in cyberspace, until San Francisco-based Twilio went public in June 2016.
Nationally, tech IPOs are down about 50 percent for the year, after a more significant year-over-year decline in 2015. In Colorado, the drought dates back to Zayo Group’s IPO in late 2014. Before that, it was Rally Software in 2013, but that IPO was effectively undone by the Boulder-based company’s acquisition by CA Technologies in 2015.
The dearth is partly about exaggerated expectations coming in line with reality. And it’s best to keep expectations in check, not base them on the startup du jour.
“It’s not always wise to make investment decisions based on today’s IPO market,” says Peter Adams, executive director of Rockies Venture Club, a regional group of angel investors. Navigating from initial investment to exit typically requires “five to seven years and another economic cycle,” he adds.
Tech startups need to weigh the pros and cons of other exit strategies alongside IPOs. A business plan should involve multiple choices. “If that’s their one strategy, they’re going to have a hard time raising early-stage capital,” says Dave Harris, RVC’s director of operations.
Case in point: Ping Identity. The Denver-based identity platform provider was at the center of speculation it would go public for several years before San Francisco-based Vista Equity Partners bought the company for a reported $600 million in June. Adams says the deal “may provide more opportunities than an IPO would have.”
Boulder-based LogRhythm has taken its place in the IPO rumor mill, with speculation centered on 2017, he adds. SendGrid and Coalfire are other Colorado tech companies in the conversation, as was Denver-based Optiv Inc., before it opted to remain private in mid-December after private-equity firm KKR became majority owner.
The latest crop of Silicon Valley darlings typically set the bar for the entire market. “Ultimately, it’s tech IPOs that drive venture-capital valuations,” says Adams. “They’ve gone up 50 percent in the past year, in part due to the unicorn phenomenon. Hopefully, some of the tech IPOs happening will set more realistic expectations.”
As the valuations of these unicorns – private companies valued over $1 billion – soared, a ripple effect carried over to nascent companies. In the national HALO Report, early-stage valuations made a staggering leap from $3 million in 2014 to $4.6 million 2015, based on data from angel investors on seed deals.
Harris anticipates “a pretty rapid correction” to about $4 million when the 2016 report comes out in early 2017.
“Square really put the scare into the tech world, in terms of these unicorns and how that trickles down to local companies,” says Harris.
Square, the financial services, merchant services aggregator and mobile payment system company, had an underwhelming November 2015 IPO, knocking the payment provider’s valuation from about $6 billion to less than $4 billion.
Other unicorns like Uber, Airbnb and Dropbox are largely out of reach for acquisition; going public is the only real option. “No one is going to acquire Uber,” says Harris.
“Where Colorado is at a little bit different of an advantage,” he adds, “is that most of [the startups] are not raising billions of dollars before going public.”
Which plays into the law of averages: For most companies, exit by acquisition is far more likely than an IPO. “IPOs are only 1 to 2 percent of the exits for most startups,” says Adams.
Christina Richmond, the Louisville-based program director for International Data Corp.’s worldwide security services, says the IPO market for IT security companies “came to a crashing halt” in 2014. “I’ve also seen VCs slow down, but there are still some startups making huge numbers in their B and C rounds.”
Another stumbling block: “From the investor perspective, companies aren’t as profitable as they want them to be.”
“I don’t think it’s a sequel to 2001,” adds Richmond. That’s partly due to a more rigorous mindset on the side of investors at every level. “It’s not a slam dunk anymore,” she says.
Galvanize co-founder and former CFO – who left the company in October – Chris Onan says there is a level of wariness in the wake of past busts. “The public market is skeptical of ‘grow at all costs,’ which is the mantra in the tech world.” Deals must also maintain their large size with consolidation of mutual funds. “Big funds can’t look at tiny deals,” he says. While Dell raised $30 million in 1988, Onan says eight digits doesn’t cut it in 2016. “You have to raise a minimum of $100 million today.
“You’ve got to be bigger.”