2016 marked the slowest year for global technology initial public offerings (IPOs) as measured by both number and value in at least the last five years. The combination of uncertain market conditions, high private valuations and ample cash hordes allowed many companies to wait until public markets offered a more favorable environment. After a slow start, global technology IPOs recovered slightly in the second half of the year, with public offerings of cloud software companies Twilio (NYSE: TWLO), Nutanix (Nasdaq: NTNX), and Coupa Software (Nasdaq: COUP). Each company traded above its offering price, illustrating the pent-up demand for technology IPOs. There has been some softness recently as both Nutanix and Coupa are currently trading below their opening day prices but are still valued above the initial offering.
We’re now entering into an environment that looks to be highly favorable for companies seeking to go public. Several factors, including the post-election rally, prospective U.S. tax reform, improving economic conditions and heightened demand for technology IPOs, suggest that 2017 could be a much better year for new offerings in the sector. The quality of the new batch of IPO-ready technology companies is unprecedented. Many of these companies have world-class management teams, leading products, are generating revenues upward of $50-100 million per year, are growing 30% or more annually and are profitable (or on a clear path to get there).
AppDynamics was on track to kick-off the 2017 technology IPO activity with an offering scheduled for January 26. Instead, in a last minute push to acquire the company, Cisco feverishly conducted its due diligence of the business, resulting in the announcement of its intent to acquire the company on January 24 – just two days before the company was slated to go public. The $3.7 billion acquisition (a $1.8 billion premium to the company’s prior private round valuation) is expected to close at the end of April. While this was a big loss (potentially) for public market investors, the excitement around the prospective IPO was a good sign for other companies that are considering a public offering in 2017.
Snap, Inc., parent company of Snapchat, is the next high-profile technology unicorn[1] with eyes on an IPO. The image messaging and multimedia mobile application company, which is reportedly valued at north of $25 billion, filed for a public offering on February 2 and may hold its IPO as soon as March. Given the favorable market dynamics, the success of a couple of public offerings could open the flood gates for companies seeking to go public. There are a number of technology start-ups that are viewed as strong IPO candidates and share many or all of the positive attributes mentioned earlier, including cloud storage company Dropbox, meal kit company Blue Apron, mobile travel app company HotelTonight and music streaming service Spotify, among others.
Key Takeaway:One successful technology IPO could potentially lead to others this year. The market seems ready for it. Given the number of privately-held technology companies that are leaders in their respective areas, 2017 truly could shape up to be the best technology IPO year the market has seen in some time. From a limited partnership (LP) standpoint, it’s never a bad thing to validate the private market valuations ascribed to your portfolio companies and achieve some hard-earned liquidity.
[1] A start-up company valued at more than a billion dollars, typically in the software or technology sector.
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