2017 Tech IPO Outlook
DECEMBER 5TH, 2016
Uncertainty surrounding this year’s presidential election (along with other contributing factors) kept U.S. IPO activity at a sluggish pace—so sluggish, in fact, that this year could end with the fewest IPOs since 2009. Through the first three quarters of 2016, Pitchbok counted just 49 private equity and venture-backed IPOs. That’s down almost 50 percent in both categories from the same period in 2015. Additionally, PitchBook counted only Nutanix and Twilio as “unicorn” IPOs—private companies valued at more than $1 billion.
But this is no time to trash talk the IPO market, many institutional research firms are predicting a surge of IPOs in the weeks and months to come. PitchBook counted seven private equity and venture-backed IPO filings in October: Everspin, a computer technology company in Chandler, AZ; iRhythm, a digital health technologies company in San Francisco; Obalon, a medical device company near San Diego; Ra Pharmaceuticals of Cambridge, MA, Quentenna Communications of Fremont, CA; Coupa Software of San Mateo, CA; and AquaVenture Holdings, a utility sector company in Tampa, FL. Renaissance Capital, which counts all IPOs (not just private equity and venture-backed deals) estimates there may be as many as 250 companies that are preparing to go public in the weeks and months to come.
The Coupa offering is particularly interesting because it sets a new minimum bound with regards to pre-IPO financial parameters, and provides a good counter-argument to the common refrain that public markets won't understand the business models of private tech companies. Coupa's most recent quarterly revenue of just over $30m sets a useful benchmark for prospective 2017 tech IPOs. Coupa also proves that unprofitable SaaS companies that have achieved scale can grow by less than 100% YoY, and still debut at a significant valuation. Coupa's shares are up 94% over its IPO price, and given the company's current annual run rate ($124.5m), and it's current market cap ($1.68b), Coupa sports a multiple of more than 13x sales.
Along with Coupa, we also saw Twillo's 2016 IPO open the window for VC/PE backed tech companies in late 2016 and beyond. Twillo provides another proof point that unprofitable companies with $200m annual run rates and 80% YoY growth can IPO at a significant valuation. Twillo priced at $1.8b, and is currently trading at a $2.61b market cap, giving the company a 13x sales multiple.
Looking ahead, 2017 may be an incredibly important year for the ever-growing group of private unicorns. The capital fueling private unicorns demands an exit. It's difficult to imagine a string of billion dollar plus M&A deals. Thus, it seems more likely that unicorns will pursue IPOs. We learned this month that Snapchat is expected to go public in either the closing days of the first quarter, or the early portion of the second. Additional 2017 unicorn IPO candidates include Airbnb, AppNexus, Pinterest, Dropbox, Uber, Spotify, Slack, Domo, Qualtrics, SendGrid, AppDynamics, MongoDB, DataStax, Marklogic, Cloudera, MapR. Many of these IPOs will dwarf the VC/PE backed tech IPOs we saw in 2016, but we could also see many 2017 IPOs from companies that are not currently valued as private unicorns.
According to Renaissance Capital data, on average 2016 IPOs are trading up 30.8 percent over their IPO price, with an average first-day gain of 12 percent in IPO trading. IPOs so far this year also have been priced at 6.6 percent below the midpoint of their proposed pricing range. Thus IPOs have been priced reasonably and the returns have been good. This performance is likely to generate demand for additional IPOs in 2017.
The combination of the early 2016 trailblazers (Twillo/Coupa) opening the IPO window, the increased IPO momentum in October, and the impressive performance of the average 2016 IPO, leads me to believe that we will see a significant increase in IPO activity in 2017. In addition, I suspect that the new Administration's proposed reductions in the corporate tax rate will further help small to medium sized companies that are preparing to go public.
This IPO momentum is particularly exciting for VC/PE investors, as it could potentially provide liquidity, along with public market validation of tech business models and the underlying ability of tech companies to create shareholder value. 2017 is shaping up to be an exciting year for private tech companies and private tech investors alike.
