- Union Square Advisors
With 2016 marking the second straight year during which we saw a meaningful decline in the number of technology IPOs (20 tech IPOs down from 34 in 2015, and 60 in 2014) we expect to see a significant rebound in the year ahead.
We are tracking more than 90 companies that actually have filed their IPO paperwork, have indicated a near-term likelihood of doing so, or have stated their desire to go public at some point in 2017. While it’s highly unlikely that every one of those companies will go public this year, even if only a third to a half of them do, then we will have a meaningful uptick in IPO volume compared to 2016 levels. Given that public tech investors as a whole have done meaningfully better in their investments in 2016 than in years prior, we believe they will be positively inclined to continue to invest in tech IPOs going into 2017 – albeit still on a fairly selective basis.
Within that group of 90+ potential IPOs this year, we believe that public investors are focused on companies that have a balanced approach to pursuing both growth and profitability. Notwithstanding the fact that category creators and disruptors typically get a warm welcome in the public markets, investors today are increasingly focused on profitability (or at least on a clear path to profitability) as an important consideration when valuing technology companies, in addition to their traditional focus on/expectations for growth. We have seen multiple recent examples of private companies that have taken steps to rein in spending and accelerate their move to profitability in anticipation of going public.
President-elect Trump’s Impact
The big question on a lot of people’s minds now is: how does a Donald Trump presidency affect the tech IPO market? Our initial view – with the caveat that there are a lot of unknowns regarding the specifics of President-elect Trump’s various policies – is that the impact will be limited. Although Trump has publicly highlighted his issues with some of the largest tech companies, including Apple and Amazon, these firms are already public and global in nature.
- Spencer Platt/Getty Images
President-elect Trump is a business person first, who wants to see the U.S. build upon or rebuild its competitive advantages in various areas, and there’s no question that the technology sector represents one of America’s significant competitive bright spots. The potential 2017 tech IPO class members are, by and large, companies with employee and asset footprints that are still primarily U.S.-based, and their ability to access the capital markets in order to continue to grow and augment American economic success would seem highly consistent with the President-elect’s stated objectives.
The Impact on M&A
We would also point out that an equity market that is open for IPOs also provides a good foundation for the continuation of an active M&A environment, for multiple reasons:
First, as companies file for an IPO, they are indirectly announcing that there is a limited amount of time remaining before they will (likely) become more expensive to acquire as public entities. This often creates a catalyzing event for would-be acquirers, who would rather buy companies at pre-IPO rather than post-IPO valuation levels. It also provides an option for private companies to pursue a “dual track” process, whereby they simultaneously evaluate/pursue both going public and selling in order to achieve an optimal outcome.
Second, buyers understand this dual-track dynamic very well. To the extent that later-stage private companies have the option to go public, this gives them an alternative to pursuing a sale if they find the value that an acquirer would be willing to pay uninteresting. In essence, the IPO market provides a “stalking horse” for the potential seller, such that an acquirer knows the target has a viable alternative to a sale and, therefore, the acquirer must offer a price that is compelling in the face of this going-public alternative.
Third, for those companies that do successfully pursue an IPO, they gain scale and acquisition currency (both cash and liquid stock) to pursue their own acquisition agenda as a consolidator, thereby increasing the pool of potential strategic buyers for subsequent transactions.
Ted Smith is Cofounder and President of Union Square Advisors.