This article first appeared in The Edge Malaysia Weekly on January 14, 2019 - January 20, 2019
NOT since late 1999 and the first few months of 2000, at the height of tech and dotcom bubble, has there been such a long line-up of tech firms seeking a listing on the stock market. Unlike the heady days at the turn of the century, when even Pets.com made it to the tech-heavy Nasdaq, this year’s list is formidable. If all the tech unicorns, or venture capital (VC) funded tech companies with valuations of more than US$1 billion that have already filed paperwork — or hired investment banks or law firms to prepare them — are actually listed, 2019 will be a blockbuster year for tech IPOs.
Ride-hailing giant Uber and its main rival Lyft, home-sharing firm Airbnb, social media player Pinterest and messaging and office productivity tools provider Slack are among those that have already hired investment banks. Other firms that are reportedly ready to list this year include online delivery firm Postmates; internet-connected, indoor cycling bike firm Peloton Interactive; and web security firm Cloudflare. The listings could be a bonanza for investment banks, law firms, investor relations outfits and communications firms, and indeed further boost already overheated real estate prices in the San Francisco Bay Area as executives rolling from IPO riches start to splurge.
VC-backed tech firms raised more than US$20 billion through IPOs in the US last year, up from about US$12 billion in 2017, according to financial research firm Dealogic. This year, tech firms could raise at least twice as much as they did last year. Uber alone is reportedly looking to raise US$10 billion, whereas Lyft and Airbnb are reportedly in a market to raise at least US$2 billion each.
This year’s tech IPO boom follows a horrible last quarter for tech stocks. Between early October and what is now being dubbed the “Christmas Eve massacre” in the market, the tech-heavy Nasdaq Composite Index fell 23%. Large-cap tech stocks including FAANG plays Facebook, Amazon.com, Apple, Netflix and Google’s owner Alphabet were collectively down nearly 30% during the period.
Almost all major tech IPOs last year — including music streaming firm Spotify, speaker maker Sonos, cloud storage firm Dropbox, survey research firm SurveyMonkey and software firm Domo — saw their shares trade below their IPO price at year-end. Star-studded tech IPOs could help lift the tech sector, which is still reeling from that scary market selloff.
Private markets a key source of capital
Yet, even as the public markets were being hammered in the lead-up to Christmas, private markets were doing well. Indeed, 2018 was a record fundraising year for pre-IPO tech companies in the US. They collectively raised more than US$31 billion in pre-IPO funding rounds in 208 deals, compared with just US$2.2 billion raised in 138 deals in 2012.
To be sure, over the past decade or so, the real action in the technology sector has been in private rather than public markets. VC firms that have struck it rich, following the listings of companies such as Facebook, Alphabet and Alibaba Group Holding have ploughed back their huge winnings into seed funding and VC rounds in other start-ups nurturing new unicorns. Lured by outsized gains in tech, capital from around the world has poured into Silicon Valley start-ups. Japan’s Softbank Group Corp pooled nearly US$97 billion from Middle Eastern sovereign wealth funds and other investors to invest in tech start-ups and pre-IPO firms. So, companies are taking a lot longer before they even consider an IPO.
There were 33 VC-backed tech IPOs in 2014, only 19 in 2017 and 20 in 2018. Why go public and subject yourself to intense market scrutiny every quarter when you can get private capital? The median time between the first funding and the IPO for US VC-backed tech companies that went public in 2013 was 6.9 years, according to VC research firm CB Insights. Since then, the median time has climbed to 10.1 years. At the height of the 2000 tech bubble, the average age of the IPO company was less than two years.
In addition, promising tech companies are being taken out by strategic buyers or private-equity players at attractive valuations just before their IPO. Last year, several companies on the verge of going public saw a strategic buyer emerge to buy them out. Among the firms were Qualtrics, Glassdoor, Adaptive Insights and app-focused companies such as AppNexus, AppDynamics and Apttus.
Moreover, companies that still opt to list do not seem to need much money. A good example is Spotify, which did not raise a single cent in its unusual direct IPO last year.
Private tech companies are raising a lot of money just prior to their IPO. In 2012, the median amount raised by tech companies in 12 months prior to their IPO was just US$64 million. Last year, the median amount raised in the year leading to their IPO had increased to US$239 million. A company that has just raised hundreds of millions or, indeed, billions in the weeks and months before its IPO does not really need to raise a lot more during the IPO itself. Last year, only one US tech IPO — Atlanta-based fintech firm GreenSky — raised more than US$1 billion in its IPO. During the 2000 tech boom, seven US tech IPOs raised more than US$1 billion.
Uber the biggest tech IPO in five years
The mother of all tech IPOs this year is likely to be Uber. It raised money from Vision Fund in the private markets at a valuation of US$76 billion last year. In September, Silicon Valley analysts were speculating that Uber could raise up to US$12 billion, at a US$120 billion valuation, from its IPO. Since then, estimates have been revised to US$10 billion in capital raising in an IPO that values Uber around US$90 billion. The company is expected to report a loss before interest, taxes and non-cash items such as depreciation and stock compensation of nearly US$1.7 billion on revenue of US$10.7 billion for last year.
Uber is said to have burnt US$1.4 billion in cash in the first nine months of last year on operations and capital expenditure. That would narrow to US$500 million this year on net revenue of US$14.2 billion. It is expected to have earnings before interest, taxes, depreciation and amortisation (Ebitda) of US$1.5 billion in 2020, with net revenue of more than US$18 billion. (Uber’s rival Lyft, which is likely to beat it to IPO by a few weeks, reported revenues of US$1.47 billion in the first nine months of last year, with losses of more than US$627 million in the same period.)
Over the years, Uber has amassed US$4.8 billion in debt. It is spending an additional US$1 billion over the next 12 months on electric scooters. But the company is also sitting on a treasure trove of minority stakes in ride-hailing companies around the world. Uber values its stakes in China’s Didi Chuxing, Southeast Asia’s Grab and Russia’s Yandex at more than US$12 billion, with Didi alone accounting for around US$8 billion.
Unlike loss-making Uber and Lyft, Airbnb has been making money for some time now. In 2017, the company posted US$100 million in profit on US$2.6 billion in revenue. Analysts expect Airbnb to report revenue of nearly US$4 billion for last year and be another fairly profitable one this year. The IPO is expected to value Airbnb at more than US$50 billion. The recent market hammering of Snap is likely to weigh on the IPO of Pinterest, which was hoping to raise more than US$1 billion, with a valuation around US$18 billion. Now, it might be lucky to get a US$12 billion valuation.
One unicorn that is in no rush to roll out its IPO is WeWork, the beleaguered co-working start-up that has faltered, burning up more of its cash than anticipated. WeWork’s losses are likely to top US$2 billion for 2018. It has raised nearly US$5 billion since it was founded, most of it coming from the Vision Fund.
Until recently, Softbank was so bullish on WeWork’s prospects that it had planned to invest US$16 billion more — at a jaw-dropping US$40 billion valuation — to quickly get it up to speed ahead of its planned listing. Now, Softbank is putting up US$2 billion, all by itself, in new funds as the Vision Fund sits out the cash raising. Holding company, The We Company, has been rebranded and is unlikely to list until 2020.
Aside from the big US tech IPOs, several large Chinese tech IPOs are in the pipeline this year, including information platform Jinri Toutiao’s owner Bytedance, Didi and video-sharing app Kuaishou. (Alibaba affiliate Ant Financial, which was supposed to have listed in 2019, has pushed its IPO to 2020.) Many of the larger Chinese tech IPOs are headed for Nasdaq rather than the Hong Kong or Shanghai exchanges.
There were 32 China tech IPOs in the US and Hong Kong last year. Among them were smartphone maker Xiaomi Corp, which raised US$5.4 billion in July; food delivery service app Meituan Dianping, which raised US$4.2 billion; online discounter Pinduoduo, which raised US$1.6 billion from its US listing; and ZhongAn Online P&C Insurance, which listed on the Hong Kong bourse. All of last year’s Chinese tech IPOs are now underwater. Didi, which is reeling from the fallout of the murders of two women who used its services, was at one point preparing a listing to raise up to US$8 billion at a valuation of more than US$80 billion; it may now raise a lot less. Ride levels have fallen sharply from 25 million to 20 million a day.
All in all, 2019 could turn out to be a great year for tech IPOs. New listings will allow VC firms to exit their investments at huge gains, which they can plough back into new disruptive start-ups in cloud services, artificial intelligence, robotics, machine learning and fintech, starting a whole new cycle of innovation that would lead to more IPOs 5 or 10 years down the road. There is just one caveat. If US President Donald Trump’s government shutdown is prolonged, tech IPOs could be delayed by months and some even pushed to next year.
Assif Shameen is a technology writer based in North America
Save by subscribing to us for your print and/or digital copy.
P/S: The Edge is also available on Apple's AppStore and Androids' Google Play.