Top 5 Tech IPO Market Trends & Sentiments
Nasdaq’s Private Company Advisory team hosted several calls recently with the U.S. technology investment banking community to assess current sentiments and identify prevailing trends amidst the COVID-19 pandemic. Here are the key takeaways:
- Resumption of tech IPOs. The current IPO market has been limited to life sciences companies and SPACs. When will the tech IPO window open? The general consensus is that while a few late-stage tech companies on file will launch over the summer, the majority will wait until later in the year. With many public companies withdrawing 2020 full year guidance and financial outlooks for 2021 uncertain, IPO prospects and their underwriters will likely forego a public debut that involves a potential “miss” on financial results out of the gate. Investors need to be able to model future performance and determine valuation based on forward multiples; that requires the return of a somewhat normalized operating environment. The election cycle also remains a wildcard that may further impact tech IPO timing.
- Greater emphasis on profitability. Even prior to the COVID-19 crisis, investors were already favoring companies that were either profitable or that had a “clear line of sight” on profitability. The pandemic has only served to reinforce this shift away from “growth at any cost” business models. Companies with size, scale, and brand that are operationally focused with exceptional management teams will likely lead the way. The software sector remains promising with predictable, subscription-based recurring revenues, high quality cash flows, strong balance sheets, and mission-critical services to enterprises. The internet sector may have some bright spots around gaming, media, and certain areas of ecommerce, but internet companies in more challenged segments are already taking steps to resize their businesses for lower growth and improved profitability.
- Reset on easy access to capital. Gone are the days for most private tech companies of pick-of-the-litter financings at lofty valuations. Convertibles and PIPEs are increasingly common with public peers, and private companies are taking note. Capital constraints in the private markets will likely result in business wind downs and increased M&A exits. In addition, well-managed, well-capitalized private companies with greater optionality may look to delay entry to the public markets pending improvement in valuations.
- Direct listings on hold. In recent years, direct listings emerged as a much discussed alternative to traditional, underwritten IPOs with broad-based liquidity, no lock-up period, and lower banking fees. Some venture capital investors promoted direct listings, and a prestige factor took root. With less access to capital in the current environment, companies that were willing to forego a primary raise in conjunction with a public listing are now reconsidering their financing needs for the long term.
- Virtual meetings gain traction. Banks are now relying on virtual meeting technologies for multiple applications including investor conferences, bake-offs, analyst days, filings, roadshows, and private placements. While most of these activities will eventually revert back to in-person events, technology has earned its place during this period and will surely play an increasing role moving forward. For example, in secondary investor markets which are home to important buy-side institutions, roadshows to these cities may now be conducted virtually by the banks instead of overlooked entirely. In recent weeks, Nasdaq has welcomed several IPOs which have relied solely on virtual technology for roadshows and to ring Nasdaq’s opening bell.
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Private Markets Coronavirus Technology
Jonathan Schaffer
Nasdaq
Jonathan Schaffer led Nasdaq’s Private Company Advisory (PCA) effort, which provided complimentary support to select companies ahead of a potential offering. Prior to joining Nasdaq in 2018, Jonathan spent 20 years as an IPO advisor and investor relations consultant.
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