- The number of tech startups going public should jump to around 50, investment bankers who cater to the industry say.
- But don’t expect a lot of big-name companies to hit the public markets. Instead, enterprise-software companies will likely represent the lion’s share of new offerings, the bankers said.
- Many startups are feeling pressure from venture investors and employees to go public — and may sense a welcome market ahead for their shares, the bankers said.
Dozens of tech companies are angling to go public this year, as a crop of maturing startups scramble to take advantage of favorable conditions on Wall Street. But Spotify and Dropbox aside, don’t expect many big names to be part of the rush — at least not right away.
That’s the word from investment bankers at Deutsche Bank and UBS who work with tech startups planning initial public offerings. While the world is eagerly waiting for the big-name, multi-billion dollar “unicorns” such as Uber or Airbnb to go public, the real tech IPO parade this year is being led by smaller startups focused on less glamorous but solid businesses like enterprise software and cloud infrastructure.
“It’s going to be a really busy year for software,” said Kristin DeClark, head of technology equity capital markets at Deutsche Bank, who tells Business Insider that she’s already seeing important signs of growing momentum.
After several years of f ewer-than-average tech offerings, demand is strong. And recent policy changes, such as the Trump tax plan, are creating ripe conditions for public listings.
“Not only should this year be a good one, but we expect the momentum to continue well into 2019,” DeClark said.
She’s projecting the number of IPOs this year will range between 50 and 60.
At least one tech IPO “bake-off” per week
In the fourth-quarter of last year, 11 tech companies hit the public markets. If the industry continues that pace, 44 tech companies would go public this year, she noted.
But there are signs that activity is picking up. DeClark said that since the start of the year, at least one tech startup a week, and sometimes two, has held a so-called bake-off, which is the process by companies looking to go public meet with investment banking firms to determine which will lead their offerings.
The startups that make their debuts on Wall Street “won’t be the names, potentially, that every single reader will know,” said Mike O’Donovan, managing director of equity capital markets at UBS.
“I think a lot of the big guys are going to stay on the sidelines a little longer,” said Mike O’Donovan, managing director of equity capital markets at UBS.
Some of the largest and most well-known privately held tech companies have already taken a 2018 IPO off the table, including Uber, the $69 billion ride-sharing giant, and the $31 billion home rental service Airbnb. Pinterest is also looking to 2019, according to a report in Recode.
The upcoming IPOs of Spotify and Dropbox— both, popular consumer brands slated to go public in the coming months — are the exceptions. And they’re being closely watched by the other tech unicorns.
“Those will be important as two tests of the market,” O’Donovan said.
The market loves the SaaS model
For business-focused tech startups though, there’s much less hesitation to go public.
Even amid all the recent volatility in the markets, shares of publicly traded enterprise software companies have generally held up, noted O’Donovan. Such companies, particularly the software-as-as-service (SaaS) businesses that rely on subscriptions, tend to offer a compelling story for investors, with revenue that’s easy to forecast and good cash flow. Even when they don’t perform well in the market as standalone companies, they often offer enough value to be good candidates for acquisitions by bigger companies.
“The market loves the SaaS model,” said O’Donovan. “It’s traded these names well.”
Although only a few such companies have filed the public paperwork for an IPO so far, including cloud security company Zscaler and customer support tech firm Ibex Holdings, the bankers say there are many more in the pipeline.
There should be around 30 companies from the broader enterprise software space that go public this year, O’Donovan said.
To get 50 IPOs will likely require a decent number of European or Asian companies — in addition to Spotify — to file for offerings in the US.
“Could there be 50? There could be, but you need a lot of things to fall right for that to happen,” O’Donovan said.
In addition to the software companies, DeClark thinks some internet names will also head to the public markets this year and possibly some startups that focus on internet-of-things devices and related subscription services.
“The whole theme of connected lifestyle is important to investors,” she said. “Some companies that have indicated they’re going to go public are attacking that theme.”
Both DeClark and O’Donovan pointed to similar reasons for why they expected the IPO market to surge this year. Many startups are starting to feel pressure to go public.
The pressure is on — but opportunity awaits
Many have been private for years, longer than is typical for a tech startup, and some venture investors are eager to see a return on their investments. Managers want to be able to use their company’s stock to acquire other companies, something that’s much easier if that stock is public. And employees who’ve been paid in stock options want to be able to cash them in.
For many startups, “the next step to retain top talent is to take the company public,” said DeClark.
And the climate is good for IPOs. Public investors are eager for more new tech offerings. 2015 and 2016 were down years for tech IPOs. While last year’s numbers were up, they still didn’t approach those in previous boom times. So there’s a lot of pent-up demand.
That demand could be amplified by the recently passed tax law. That law gave tech giants and other companies a break on bringing home the cash they’ve stored overseas. Many of those companies plan to use their foreign cash to buy up some of their outstanding shares. That will leave fewer shares on the market for tech investors to purchase, noted DeClark.
And new tech shares are particularly attractive to growth investors, because they’ve typically outperformed broader market indices. That’s something few classes of shares could claim last year, amid the booming market.
“That’s a good backdrop to be issuing IPOs,” said DeClark.
Added O’Donovan: “The fundamentals of the market are really strong.”