The Reason Tech IPOs Now Face A Much Higher Bar

Investors no longer trust inflated private market valuations, suggesting that, as a long term strategy for venture capital, keeping startups private rather than taking them public was probably not a great success. JL

Dan Gallagher reports in the Wall Street Journal:

The current bull market hasn’t translated into irrational exuberance for new tech issues. That should be a warning sign for others lining up for a run at the market this year. The ranks of private companies stuffed with capital have continued to swell; 215 now carry a private-market valuation of $1 billion or more. The largest are also getting a bit long in the tooth. With investors now looking more closely at the bottom line, even the biggest unicorns pack much less charm.

Tech companies that went public in 2019 ended the year on a rather sobering note. The question is: how long this new period of sobriety will last.

The most notable debutantes from the tech sector were left out in the cold during the market’s hot run. In a year that saw the Nasdaq jump 35%—its best performance since 2013—most tech companies that went public closed 2019 below their first-day opening prices and at least nine closed below even their IPO prices, which are carefully selected to ensure gains. These include the largest in the class of so-called unicorns valued privately at more than $1 billion. Shares of Uber Technologies, UBER 3.41% Lyft LYFT 1.88% and Slack Technolon other words, the current bull market hasn’t translated into irrational exuberance for new tech issues. That should be a warning sign for others lining up for a run at the market this year. The ranks of private companies stuffed with capital have continued to swell; 215 now carry a private-market valuation of $1 billion or more, according to PitchBook data. The largest are also getting a bit long in the tooth, which means investors getting antsy for an exit and employees eager to turn their stock options into real money. According to PitchBook’s data, the 26 companies currently valued at more than $5 billion are now a little over 12 years old, on average.gies WORK -0.25% ended the year down 40% from their first-day opening prices, on average. That reflects the growing reluctance among public investors to accept inflated private market valuations—a sentiment that sharpened after the WeWork debacle. The parent company of the overhyped office-sharing firm pulled its planned listing in mid-September after investors balked at its shaky finances and unorthodox management structure.

The move cast a notable chill over the IPO market, giving public investors further cause to rethink the business models of companies already valued in the billions but still burning cash. According to Dealogic, only seven U.S.-based tech companies have gone public since WeWork’s parent pulled its IPO.

Of the 20 tech companies that went public in 2019 before the WeWork debacle, 16 saw their market values slide afterward by an average of 23% by the end of the year. That too was out of whack with tech stocks in general, and the rest of the market. The Nasdaq Composite rose 10% during the same period. Renaissance Capital notes that more than 60 firms on its private company watch list already have selected bankers or filed IPO papers confidentially including include alternative lodging provider Airbnb and delivery provider Postmates. Rival delivery firms Instacart and DoorDash also are widely rumored to be considering a listing this year.

These all are well-known companies running services that have exploded in popularity in recent years. With investors now looking more closely at the bottom line, though, even the biggest unicorns will pack much less charm.