The pandemic as well as current market conditions have created the right climate for technology startups to move forward with ambitious IPO plans.
The biggest IPO in the making is that of Ant Group, Alibaba’s payments arm, which aims to raise $30 billion by October. This could push its valuation as high as $200 billion. Technology startups in the U.S. have attracted $10 billion so far this year, and many more are lining up. Airbnb filed for an IPO in August. A herd of unicorns is following suit, including cloud software maker Snowflake Computing, restaurant and grocery delivery services DoorDash and Instacart, and Palantir, a data management firm that is planning a direct listing. Combined, these five have a valuation of $80 billion, PitchBook estimates.
Comparisons with the 1990s dot-com bubble are inevitable, and analyst assessments fall into different camps. Lise Buyer, founder of advisory firm Class V Group, which helps startups with IPOs, describes the current state of mind as “irrational exuberance”.
Current trends in the financial markets offer context. Prior to the pandemic, technology startups had lost some of their lustre in the eyes of venture capitalists. The listings of Lyft and Uber were underwhelming. WeWork’s was a failure. Concurrently, low interest rates have heightened pressure for returns on capital. Investors in the stock market are ready to accept high valuations, says Lauren Cummings of Morgan Stanley. Brian Feinstein of venture capital firm Bessemer Venture Partners concurs, saying there is “insatiable demand by public investors.”
Then there is the pandemic, which has given tech firms at all echelons a boost. At the very top, according to The Economist, “The five big platforms – Alphabet’s Google, Amazon, Apple, Facebook and Microsoft – have thrived as self-isolating consumers spend more time and money online, and firms splash out on cloud computing services to enable remote working.” SMEs, including some newly public tech firms, are humming along nicely. Startups are eager to seize the moment, including those that had put their listing plans on hold after the aforementioned ill-fated IPOs.
Sarah Cannon of Index Ventures, a VC firm, observes that the pandemic accelerated shifts towards digital businesses that were already in motion. She also believes this trend will last for decades, and the markets seem to concur – as evidenced by the massive gains in the share prices of videoconferencing app Zoom, for example, which is now worth $78 billion.
Another trend that’s shifted into high gear is the dissatisfaction of startups and VC firms with the slow, cumbersome and costly public offering process. Alternatives such as direct listing are gaining viability. Spotify and Slack both took the direct listing route. The drawback is that it does not allow firms to raise new money, which limits its usefulness to those who already have plenty of funding.
Another alternative is special purpose acquisition companies or SPACS. These are essentially shell companies that go public, buy one or more private firms, and fill the shell through a reverse merger. Their history is mixed, but they are being improved upon. They are also growing in number and size: The biggest tech firm to use one is electric vehicle startup Nikola, which went public in June and now has a market cap of about $16 billion. Some believe future startups will have even more flotation options, though Wall Street will likely stay in the picture.