Funding will be used to advance the company's technologies and expand operationsRead more...
IPO market is seeing its best numbers since 2000, is the JOBS Act helping?
While the IPO market isn't at the insane levels we saw in the late 90s, when there were upwards of 500 hundred companies going public, the activity is definitely heating up.
After a few anemic years following the crash of 2008, companies are once again willing the take the risk, and investors are once again willing to put in the money.
Make no mistake about it: 2013 was a very strong one for the IPO market, with major increases from 2012. A total of 222 companies went public last year, a 73% increase from the year before. And those companies together raised $55 billion, representing a 29% year-to-year increase, according to a report from IPO investment firm Renaissance Capital
2013 was so strong, in fact, Renaissance called it "the best year for the US IPO market since 2000." This year, though, already looks to be even bigger.
In the first two months of this year alone, 42 companies went public in the United States, raising a total of $8.3 billion. That ties with 2007 for the busiest start to a year for initial public offerings since 2000, when there were 77 in the same time period.
To compare, last year, saw only 20 offerings in the first two months.
To put it another way, if this year's pace continues, it would reach 252 companies going public by the end of this year, with a total of $49.8 billion raised. Compare that to the 406 IPOs, which raised $96.9 billion in 2000, and we still have a long way to go before we go back the dot-com-era levels. Of course, it's probably a good thing that we're not at those levels.
How are Tech IPOs faring?
More importantly, which kinds of companies are going public? Right now it seems to be mostly energy and biotech companies.
This year so far, 26 healthcare companies went public, raising $1.5 billion, while six energy companies did the same, raising $2.3 billion, according to Renaissance Capital. At the same time, there have only been three tech/Internet IPOs, which raised a total of $0.4 billion.
Two of those tech IPOs were Care.com, as well as Coupons.com.
The numbers might not seem strong, but there are plenty more companies rumored to getting ready for an IPO, including: Wayfair, which raised $157 million at a $2 billion valutation; DocuSign, which raised $85 million in the last couple weeks; Square, which is reportedly raising $200 million at a $5 billion valuation; and Dropbox, which raised $350 million of a $450 million round at a $10 billion valuation.
It wouldn't be a shocker if a number of these companies file to go public at some point this year. Remember, we have a long way to go in 2014.
Already two companies have made their IPO filings known so far in 2014: Candy Crush maker King, which is looking to raise $500 million, and food delivery service GrubHub, which is looking to raise $100 million.
Or maybe others have filed and we don't even know about it!
The thing to remember is that the numbers we're seeing may not be indicative of how many companies are actually planning to go public as some may have taken advantage of the provision of the JOBS Act that allows companies with less than $1 billion in revenue to file confidentially.
According to the bill, companies don't have to disclose anything about their financials until 21 days before the start of its road show, where it will have to market itself to investors, if the company ever even decides to have one.
While the confidential filing makes it hard to know how many companies are in the pipeline, it is also at least partially responsible for the health of the IPO market, Kate Mitchell, Managing Director of Scale Venture Partners, and one of the architects of the JOBS Act, told me in an interview.
The provision helps companies feel more confident that even if they don't go public after they filed, they wouldn't have had to publicize their financials, she said. There's less than a 25% chance for a company that files to go public to follow through with an IPO, she told me. There's a number of reasons for this, including a geopolitical crisis, like the one in the Ukraine right now, or the company simply can't get ready. When that happens, "they get none of the benefit of going public, but all the costs of it," she said, including a potential hit to the company's reputation.
Now, when a company starts the process, the JOBS Act allows them to have a better path to profitability, with the end being that companies perform better than they would have otherwise.
Ultimately, she said, the provision helps both buyers and sellers, as it opens up a dialogue between the company and investors, who get to see more information during the drafting process.
For example, the confidential filing provision could have helped a company like Groupon, which was hit with public embarrassment after serious accounting errors came to light.
Groupon filed for a $750 million IPO in June 2011, but in August the company was forced to discard its “adjusted consolidated segment operating income” accounting method which inflated the value of the company by not counting customer acquisition, online marketing, or stock-based compensation.
"Talking more to investors could have helped Groupon test the durability of its model, as well as its metrics, and readiness," she said.
The provision also allows the SEC to make additional comment, as they likely would have over the issues with Groupon's fudged accounting methods, and still likely would have made an impact. But the company would also have been able to dampen the response by fixing the issues before opening itself up to public scrutiny.
"Public image factors in a lot,” Ted Tobiason, Managing Director of Technology Equity Capital Markets at Deutsche Bank, told me. "
"When a company is private, they don’t have to worry about meeting quarterly revenue, and they can stretch their goals," he said. "They don’t have to deal with employees watching stock go down, and competitors and clients interpreting their data."
Going public, he said, can make teams nervous, so getting to test the waters in front of investors before the road show starts, and seeing how those investors react to their story under changing conditions, can help put them at ease.
"In theory, big companies will go public no matter what," he said. "The intent was for smaller companies to be able to be more confidential to spend less money on regulations and ease some of the burden."
And, so far at least, it doesn't seem to be helping much, as the median revenue for companies going public in 2013 was $109 million compared to $17 million in 2000, adjusted for inflation.
At the same time, though, nearly 75% of companies that have gone public this year are unprofitable, and just nearly two-thirds have annual sales of under $50 million. Both of those numbers are at their highest in any year since 2000.
Unless the Act is helping facilitate these smaller deals, then it's not doing its job, Ackrell said.
Ted Tobiason, Managing Director of Technology Equity Capital Markets at Deutsche Bank, also expressed some hesitation over assigning credit to the JOBS Act for the increase in IPO activity.
"In a parallel universe, I can't say if more or less companies would go public," he said. "Though if a company is apprehensive about going public, the ability to file confidentially will help."
Instead, Tobiason pointed to other factors in play that are contributing to the rebound of the IPO market.
On the supply side, Tobiason pointed to the success of cloud and SaaS companies, which has "created a lot of opportunity."
Meanwhile, on the demand side, he said that low volatility has been a big factor.
IPOs are, by definition, risky. There are a lot of unknowns, and many immature businesses trying to go public. Right now the volatility index, which is calculated using a formula to derive expected volatility by averaging the weighted prices of out-of-the-money puts and calls, is very low. That makes investors more willing to take the risk.
On top of that there were all of the successful deals in 2013.
"Capital chases performance, which helps predict the reaction to next handful of deals," he told me. "The risk to adjustment returns have been phenomenal so the willingness to invest is very high."
Valuations for top line growth stories have been rising. A high growth software company is getting a higher multiple than it would have if it had gone in 2009.
One good reason for the multiple appreciation is that investors have done exceptionally well buying fast-growing software companies the last few years, such as Workday, which rose 72% on its IPO day in 2012, Rocket Fuel, which nearly doubled its price, and Veeva Systems, which went up 85.8%.
Of course, with high valuations come high expectations.
Say, for example, if you took a software company that was making $100 million in revenue, and growing at 35%, public in 2009, that company went public at 2 to 3 times its revenue. Now, those companies are going public on 5 to 6 times revenue. On average, investors are paying a median of 14.5 times annual sales.
That's because the cloud and SaaS companies that went public performed very well and made a lot of money and the investoes now feel as if they could have gotten more from those deals.
The problem with that, though, is that putting a high valuation at the IPO can ultimately be harmful to the company. We all remember what happened to Facebook.
Look out below!
(Image source: ad-exchange.fr)
Read more from our "Trends and news" series
The company uses real-time data to help physicians make the right care decisionsRead more...
The company has seen an influx of activity since the start of the COVID pandemicRead more...
Related Companies, Investors, and Entrepreneurs
Joined Vator on
Airbnb.com is the “Ebay of space.” The online marketplace allows anyone from private residents to commercial properties to rent out their extra space. The reputation-based site allows for user reviews, verification, and online transactions, for which Airbnb takes a commission. As of June, 2009, the San Francisco-based company has listings in over 1062 cities in 76 countries.
Joined Vator on
Scale Venture Partners chooses markets for investment based on our insights into trends drawn from primary research with incumbents, customers, competitors and our network of experts. We select companies we think are going after something great.
Our investment strategy makes "scale" relevant to you for two reasons. We operate in markets where you can create large scale success. We work side by side with you to help scale your business to reach its market potential.
Most of our investments are mid to late stage, when the software is being used, the chip is in the fab, and the therapy is being tested on humans. It may still feel early to you. You may be just starting to build out your go-to-market team. It's at this stage that our own practical operating experience drives the best rewards.
Joined Vator on
Our goal at Evernote is to give everyone the ability to easily capture any moment, idea, inspiration, or experience whenever they want using whichever device or platform they find most convenient, and then to make all of that information easy to find.
And we’ve done just that. From creating text and ink notes, to snapshots of whiteboards and wine labels, to clips of webpages, Evernote users can capture anything from their real and digital lives and find it all anytime.
Joined Vator on
What is Twitter?
Twitter is an online information network that allows anyone with an account to post 140 character messages, called tweets. It is free to sign up. Users then follow other accounts which they are interested in, and view the tweets of everyone they follow in their "timeline." Most Twitter accounts are public, where one does not need to approve a request to follow, or need to follow back. This makes Twitter a powerful "one to many" broadcast platform where individuals, companies or organizations can reach millions of followers with a single message. Twitter is accessible from Twitter.com, our mobile website, SMS, our mobile apps for iPhone, Android, Blackberry, our iPad application, or 3rd party clients built by outside developers using our API. Twitter accounts can also be private, where the owner must approve follower requests.
Where did the idea for Twitter come from?
Twitter started as an internal project within the podcasting company Odeo. Jack Dorsey, and engineer, had long been interested in status updates. Jack developed the idea, along with Biz Stone, and the first prototype was built in two weeks in March 2006 and launched publicly in August of 2006. The service grew popular very quickly and it soon made sense for Twitter to move outside of Odea. In May 2007, Twitter Inc was founded.
How is Twitter built?
Our engineering team works with a web application framework called Ruby on Rails. We all work on Apple computers except for testing purposes.
We built Twitter using Ruby on Rails because it allows us to work quickly and easily--our team likes to deploy features and changes multiple times per day. Rails provides skeleton code frameworks so we don't have to re-invent the wheel every time we want to add something simple like a sign in form or a picture upload feature.
How do you make money from Twitter?
There are a few ways that Twitter makes money. We have licensing deals in place with Google, Yahoo!, and Microsoft's Bing to give them access to the "firehose" - a stream of tweets so that they can more easily incorporate those tweets into their search results.
In Summer 2010, we launched our Promoted Tweets product. Promoted Tweets are a special kind of tweet which appear at the top of search results within Twitter.com, if a company has bid on that keyword. Unlike search results in search engines, Promoted Tweets are normal tweets from a business, so they are as interactive as any other tweet - you can @reply, favorite or retweet a Promoted Tweet.
At the same time, we launched Promoted Trends, where companies can place a trend (clearly marked Promoted) within Twitter's Trending Topics. These are especially effective for upcoming launches, like a movie or album release.
Lastly, we started a Twitter account called @earlybird where we partner with other companies to provide users with a special, short-term deal. For example, we partnered with Virgin America for a special day of fares on Virginamerica.com that were only accessible through the link in the @earlybird tweet.
What's next for Twitter?
We continue to focus on building a product that provides value for users.
We're building Twitter, Inc into a successful, revenue-generating company that attracts world-class talent with an inspiring culture and attitude towards doing business.
Joined Vator on
Founded in 2006, Care.com is the largest and fastest growing service used by families to find high-quality caregivers, providing a trusted place to easily connect, share caregiving experiences and get advice. The company addresses the unique lifecycle of care needs that each family goes through-child care, special needs care, tutoring and lessons, senior care, pet care, housekeeping and more. The service helps families find and select the best care available based on detailed profiles, background checks and references for hundreds of thousands of mom-reviewed and pre-screened providers who seek to share their services. Through its Care.com Employer Program, corporations can offer Care.com memberships as a benefit to employees. www.care.com
Joined Vator on
Ackrell Capital is an investment bank founded by senior technology investment bankers and entrepreneurs. We are headquartered in San Francisco, and have a network of partners throughout the U.S. and in key international markets. Our bankers provide each of our clients with:
- EXTENSIVE DOMAIN EXPERTISE
- KEY RELATIONSHIPS
- SIGNIFICANT DEAL EXPERIENCE
- FOCUSED SENIOR LEVEL ATTENTION
- LONG-TERM, OBJECTIVE AND INDEPENDENT ADVICE
As a registered broker/dealer and a member of FINRA, we offer a broad range of financial advisory and capital raising services.
Joined Vator on
Lending Club is a social lending network where members can borrow and lend money among themselves at better rates.
Lending Club provides a much improved infrastructure for social lending: state-of-the-art technology to authenticate all users (ensuring making sure they are who they say they are); credit scoring systems which rate borrower risk; and, the automated clearing house (ACH) system to move the funds between both parties. In addition, we provide our LendingMatch™ system to minimize risk and allow community based lending.
Joined Vator onABN Amro, Head of Technology Investment Banking, 2000-2001 WR Hambrecht, Head of Investment Banking, 1999-2000 Donaldson, Lufkin & Jenrette, Technology Investment Banking, 1988-1999
Joined Vator onKate co-founded Scale Ventures & invests in software. Active in policies for start-ups, she chaired the IPO Task Force – the basis for the JOBS Act. Kate is also on the board of Silicon Valley Bank