Why the Titans of the Sharing Economy Are Shunning IPOs

Worries about demand - both financial and operational - are causing on-demand businesses to question whether the extravagant valuations they have enjoyed until recently will begin to decline.

This is consistent with the traditional investing advice, 'buy the rumor, sell the news.' Since the current valuations have fully captured the rumor, the fear is that there is nothing left but news, and it can't be all good. JL

 Tom Braithwaite reports in the Financial Times:

Early investors in any large “unicorn”are worrying that the private valuations are vulnerable to a tougher economic or market climate. There is no reason to believe demand is going to get better and every reason to think it could get worse.Then there is the supply side, which should be more worrisome. With about 150 private tech companies with a valuation of more than $1bn, the pipeline is clogged.
There will be no initial public offering this year from Uber or Airbnb. The titans of the “sharing economy” see no need to share themselves with the general public just yet. Like Snapchat and Spotify and SpaceX and Stripe — to name just the prominent private start-ups beginning with the letter S — they are choosing to remain private when previous generations of entrepreneurs would already have rung the bell at Nasdaq or the New York Stock Exchange.

A dearth of initial public offerings from the technology sector this year and some high-profile disappointments only goes to prove the point. Stay out of the harsh cold of the public markets and snuggle up for winter in Silicon Valley. Throw another bundle of venture capital money on the fire.There are some problems with this. First, while 2015 has been unusually weak in terms of volume — data from Dealogic show only 23 tech IPOs in the US compared with 62 last year — the overall performance has not been as dire as widely believed. An investor who put money in every new offering would have made an average return of 12 per cent, ranging from an increase from the offer price of more than 50 per cent at Fitbit, whose movement-tracking devices are on plenty of Christmas lists, and Adesto Technologies, a small chip company, down to a decrease of more than 50 per cent at Apigee, a software company. Only six of the 23 are down. That compares with an S&P 500 which has returned nothing at all this year, while there is not much alpha in alternatives either: the average hedge fund is down.

This might overstate the warmth of the reception for new tech companies a little. Square, one of the most prominent tech IPOs of 2015, is up a third from its IPO but only because soft institutional demand meant it was priced below the initial range. Markets did exhibit a choppy period, shown by the Vix volatility index, which reached its highest level in three years during September and October. That closed the door for a time.

But why would any tech chief executive contemplating an IPO think that 2016 or 2017 is going to be any better? US equities are up about 200 per cent from their 2009 nadir. It is quite optimistic to think that they are just pausing for breath before another surge. For all the affected nonchalance, any rational early investors in Uber or any large “unicorn”, private companies valued at over $1bn, are biting their nails, worrying that the private valuations are vulnerable to a tougher economic or market climate. There is no reason to believe demand is going to get better and every reason to think it could get worse.

Then there is the supply side, which should be more worrisome. With about 150 private tech companies with a valuation of more than $1bn, the pipeline is clogged. A couple of those companies may fail; a few more may get acquired. But as Colin Stewart, head of technology capital markets at Morgan Stanley, points out, that still leaves an awful lot. Even putting aside Uber, there might be $250bn of equity from a thinned herd of unicorns. If they choose to sell a typical 15 per cent to the public, that might mean $35bn to be absorbed over the next couple of years compared with a typical appetite for $8bn-$10bn a year. Add in the normal flow of smaller tech IPOs and one or two of the largest potential offerings such as Uber and you have an indigestible amount of equity for public markets to swallow.
“There is congestion and a supply-demand problem,” says Mr Stewart. “Something’s got to give. Either more investors, less supply or lower valuations.”
The first looks hard to envisage. In fact, as has become clear this year, big asset managers such as BlackRock and Fidelity have already accumulated significant positions in the private tech companies. They may still elect to buy more at an IPO but there is unlikely to be quite the same desperate demand for allocation as in previous hot offerings. Many hedge funds from Tiger to Coatue are also private investors. Retail demand for the likes of Uber is sure to be strong, but otherwise it is hard to see where the bigger pool of investors is going to come from to mop up additional supply.
Perhaps the supply will not come. Venture capitalists such as Marc Andreessen have predicted companies will stay private for longer. Bankers talk of a pullback in the hitherto frothy private funding market, though with a few exceptions, companies have been taking the money because it is there, not because they are desperately consuming cash. But for every chief executive genuinely happy to wait, there is one liar and 100 or more restless employees. Time to push the button.