Is the tech IPO sky falling? Headline warnings of the pullback in technology IPOs and the overall reduction of big-ticket tech companies planning to enter the public markets are the topic du jour. The total number of IPOs (18) and proceeds ($3.3 billion) in the first half of 2015 was significantly down from the first half of last year. And tech IPO volume remained particularly muted during the summer months, with the third quarter pacing down approximately 71 percent versus the same quarter last year, as of September 18, according to Dealogic.
Further fueling concerns, a number of highly anticipated tech-related IPOs, from Alibaba and Twitter to Groupon and Inovalon, have seen declines in their share prices, with some now trading below their IPO debuts. The rise in volatility and uncertainty in the broader market has brought change to all things tech. Such a relatively young and fast-growing sector is not immune to shifting macroeconomic sentiment. And many understandably see this as a pitfall.
But sometimes, down really does mean up – at least over the long haul as investors become more choosy in evaluating tech IPOs – while pre-public sector companies continue to invest in building out their business models, capturing share, and pursuing strategic M&A. The quality of technology companies entering the public markets today is vastly superior to the group that drove mind-numbing valuations 15+ years ago. Today’s tech dynamics are not equivalent to the dot-com boom of 2000. It’s not even a close call.
Many share our view. The pull-back in tech IPO volume is not only healthy – but beneficial – as companies and their financiers adjust to a less friendly climate on Wall Street and focus on making their operations even sounder. Some companies will fail and some will miss the IPO window. But, ultimately, the majority of these young and growing enterprises will get bigger and stronger -- working on their scale, their margin, and building their market leadership position without pressure from Wall Street investors – and they will be better prepared as they reach the IPO phase. It’s only a matter of time.
The stakes are certainly high. But while the amount of investment flooding into the private sector is eye-opening – $17.5 billion in Q2 2015, according to the MoneyTree Report from PricewaterhouseCoopers LLP (PwC) and the National Venture Capital Association (NVCA), based on data by Thomson Reuters – we think it’s largely well-placed. Looking beyond the smaller, developing players, late-stage funding is coming not only from venture capital funds -- it’s also flowing from hedge funds, mutual funds, sovereign wealth funds, and corporate venture arms. And the majority of their investment dollars are just that – U.S. denominated greenbacks that aim to help promising domestic tech companies to do what they do best – innovate, disrupt, and deliver.
In the second quarter, six of the 10 largest global tech IPOs were U.S. based, according to PwC’s Global Technology IPO Review. With names like Fitbit, Black Knight, and Evolent, they’re bringing change to multiple areas of our economy – from fitness and healthcare to financial services. They’re not fly-by-nights. With significant pre-public funding, they have invested in their operations, attracted talent, built-out their product offerings, and gained market share.
More companies like them may tap the public markets in the months and years ahead. And we think they’ll be just as strong, if not stronger, on pricing day. The pause in the tech IPO window will likely only advantage investors over the longer term as the best of the nation’s tech enterprises double down – and invest, build, and grow. And that’s why, sometimes, down really does mean up.
Pierre-Alain Sur is PricewaterhouseCoopers' US Technology Industry Leader across all lines of service (Advisory, Assurance, and Tax), and a Partner in the Assurance practice. He also serves as the Firm’s US Leader for the Communications, Entertainment, and Media Industries and previously led PwC’s Global Telecommunications Practice.