United States: Orrick Technology IPO Insights Newsletter Q4 2015

Last Updated: March 15 2016
Article by Stephen C. Ashley

Market Update

Initial public offerings for technology companies had a slower year in 2015, particularly in the second half of the year, and the start of 2016 has basically seen a complete closing of the IPO window.

After two robust years for IPOs, 2015 was a disappointment for tech IPOs. In fact, proceeds raised by IPOs across all industries have been estimated to be in the range of $30 billion, which is a six-year low. More alarming was the clear downtrend in offerings in the second half of the year, followed by the extreme stock market volatility that has plagued the first few months of 2016. Several companies have pulled offerings over the past few months, although they have generally indicated that they are delaying their offerings until markets stabilize and not abandoning their going public efforts entirely. It took until February 2 for the first IPO of 2016 (a biotech company) to price.

There have been a wide variety of factors contributing to both the lack of momentum for IPOs in general and the turbulence in the capital markets:

  • the availability of private financing for late stage companies at strong valuations until the fourth quarter of 2015;
  • the poor performance of recent IPOs, with more than half of newly public companies in 2015 trading below their initial offering prices by year-end; and
  • economic issues including the collapse in oil and certain other commodity prices, concerns regarding the Chinese and various emerging market economies, and uncertainty over Federal Reserve and European monetary policies.

The recent state of the public capital markets has been contributing to a more challenging environment for private financing, at least at the same lofty valuations tech companies were receiving as the number of unicorns continued to climb in 2015. Certainly the performance of several IPOs has shown a disconnect between the valuations being set by private and public investors, with private investors beginning to mark down the value of some of their investments in private companies. The IPOs of Box Inc. and Square Inc. were eye-opening for investors, both pricing their shares at levels significantly below their most recent private rounds.

A drying up of private financing may turn into a tailwind for the IPO market. At some point, VCs may begin to feel pressure to monetize their investments and force the hand of some of their portfolio companies to pull the trigger, even at valuations that will constitute down rounds – which will also have a greater impact on the stakes held by founders and employees due to down round protections frequently obtained by late-stage investors. Other companies in need of capital may find they have no alternatives. Public investors will be paying closer attention to financial performance, and existing investors may need to adjust their pricing expectations in exchange for liquidity. Ultimately, we would expect investor interest to be available for strong IPO candidates with a demonstrated ability to generate revenues, although less established or struggling companies may face greater scrutiny.

Despite the turbulent stock market and poor investor sentiment, there are still signs of life to point to for IPOs. First, a strong pipeline of IPO-ready tech companies continues to grow. There is a large backlog of companies with registration statements already publicly on file with the SEC (including those that chose to delay offerings over the past few months), and anecdotally it is understood that there are many more companies that have already made confidential submissions so or are planning to in the first or second quarter of 2016. While companies and VCs will remain cautious until the market shows some signs of stability, companies planning to go public will want to be in a position to launch quickly when a window emerges. The recently adopted FAST Act has reduced the number of days emerging growth companies need to be on file publicly before they commence their road show to 15 days from 21 days, which may result in companies waiting until the last possible moment to flip to a public filing. The key questions are when will the current market roller coaster begin to subside and whether any of the largest unicorns decide to take the plunge in 2016.

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