Home >Market >Stock-market-news >Silicon Valley needs 2017 to be a blockbuster year for IPOs

The health of Silicon Valley’s investing ecosystem in 2017 will depend on something that didn’t really happen this year: a flood of technology initial public offerings (IPOs).

While going public is just one step in a successful company’s arc, the scarcity of blockbuster technology deals in 2016 has dragged on everything from investor morale to private funding and companies’ business strategies. This year has been the slowest for US IPOs since the recession, with the amount raised by tech companies plunging 60% from a year ago.

“It’s all linked," said Asheem Chandna, partner at venture firm Greylock Partners. “When you have a healthy public market and healthy investor appetite, that increases the enthusiasm in private rounds."

In the tech world, 25 companies have gone public to date, raising $3.3 billion, according to data compiled by Bloomberg. That compares with volume of $8.3 billion in 2015 and $35.4 billion the year before, when Alibaba Group Holding Ltd. went public.

At the same time, private funding has contracted, according to research firm PitchBook Data. Venture capital invested in the US through 7 December totaled $24.8 billion, down 13% from last year and a 58% drop from 2014.

The life cycle of technology investing, from seed money to public exits, is at stake. There needs to be a robust enough environment for private market valuations to ensure technology companies remain one of the best asset classes, Christian Meissner, head of global corporate and investment banking at Bank of America Corp., said in October. Meissner spoke in an interview at the Bank of America Merrill Lynch Tech Summit in Palo Alto, California.

Snap IPO

A main catalyst for that will be how IPOs perform, Meissner said. There are already signs that 2017 will be much more healthy in terms of equity capital markets for tech.

The first big test will come with Snap Inc., the maker of the disappearing photo app Snapchat. The company is targeting a public listing in the first quarter of next year at a value of about $20 billion to $25 billion, according to a person familiar with the matter. In November, Snap filed IPO documents confidentially, under the Jumpstart Our Business Startups Act, because it has revenue of less than $1 billion.

Given that Snap may be one of the biggest tech companies to go public in the past two decades, all eyes will be on investor appetite for the latest social-media darling.

“Whereas investors were desperate for alpha in what was largely a low-return environment earlier this year, the post-election rally changes the dialogue," BofA’s Meissner said Tuesday. “A resurgence in investor optimism and the increased expectation of higher growth rates may enable companies to consider a broader array of strategic options."

Meteoric growth

The 20 technology and communications companies that listed their shares in the second half each climbed more than 25% from their debuts, led by Twilio Inc.’s 97% gain, Nutanix Inc.’s 64% rise and Coupa Software Inc.’s 48% limb.

In addition to Snap, Spotify Ltd., the world’s largest music-subscription service, plans to go public in the second half of 2017, people familiar have said. It garnered a valuation of $8 billion in a financing round earlier this year. Dropbox Inc., the popular file-storage company, has met with advisers to discuss the possibility of an IPO as soon as 2017, people have said.

The allure of investing in startups is simple: Get in early on the right company before it has meteoric growth, then cash out after it takes off. The possibility of those gains attracted all kinds of non-traditional investors —from hedge funds to mutual funds to private equity firms and sovereign funds— to take earlier, and riskier, stakes in fledgling companies, driving up valuations.

Blue Apron, Appian

The fear of falling short of those lofty valuations has helped strangle the exit pipeline. Throw in an IPO market roiled by equity volatility, and few of the more than 170 private technology companies valued at $1 billion have tested their worth on the public markets. Investors’ concerns about a successful exit have seeped into the private funding market, completing the circle.

Investors are still chasing returns though, and since Labor Day, several startups have made noise about going public. Meal-kit delivery company Blue Apron Inc. and software maker Appian Corp. have interviewed potential IPO underwriters, according to people familiar with the matter. MuleSoft Inc. and ForeScout Technologies Inc. have already chosen firms to lead their IPOs, people familiar with those deals said.

“There has been a resurgence in public market investor engagement," said William Connolly, managing director and head of technology equity capital markets at Goldman Sachs Group Inc. “Institutional investors are increasingly looking at reasons to be excited instead of reasons to say no."

Some of the largest startups, which had previously expressed skepticism at going public, have shifted their stance. Uber Technologies Inc. chief executive officer (CEO) Travis Kalanick has indicated the company is closer to a public listing. Palantir Technologies Inc. CEO Alex Karp said in October the company is finally weighing an initial offering.

Rule of 50

Separately, private investors are increasingly pushing their portfolio companies to look toward an exit. Accel Partners, the venture capital firm behind startups including Dropbox, messaging app Slack Technologies Inc. and Facebook, recently summoned the startups it’s invested in to talk IPO readiness.

The investment shop outlined for those companies its Rule of 50: To have a successful IPO, partners said, startups need to aim for earnings as a percentage of revenue, added to the percentage of annual revenue growth, to be a number at least equal to 50.

Morgan Stanley is taking a similar stance, according to people familiar with recent deal conversations: Prove to investors that a company has both revenue and profit growth, or at least a clear path to profitability.

One wildcard for next year is the impact of Donald Trump’s presidency on the markets. If anything, technology companies that are ready may try to list sooner rather than later, before Trump makes any policy decisions that could roil investors, according to Lise Buyer, founder of IPO advisory firm Class V Group.

It will be the more fundamentally sound companies that could help keep the IPO machine churning and assure that tech remains a desirable place to stash cash.

“While the market was wide open and in search of opportunities this fall, there just weren’t that many companies ready to launch an IPO," said Matt Walsh, co-head of technology, media and telecommunications equity capital markets at Bank of America. “All that demand is chasing a relatively small number of opportunities." Bloomberg

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