- August 17, 2014
- Posted by: Treadstone Management Partners
- Category: Risk Management, Strategy
Technology has forever been seen as the driver of the future. The world dreams of the day where the entirety of the planet is run by computers and the technology that runs it. With that day getting closer and closer, it comes to much surprise that there is a shift in the life cycle of technology firms. One would think that the expected ‘way of the future’ would have investors and firms alike chomping at the bit, waiting for a company to go public. However, this is certainly not the case. With recent changes in the life cycle of technology startups, and the shift in economic opinion, firms should no longer continue to pursue an IPO. This piece outlines the reasons why companies should refrain from doing so, and also looks into alternative possibilities that technology startups can look towards in the future.
With an IPO, come a number of fees and expenses. Thus, the benefits must outweigh the costs in order for the IPO to be worthwhile. With that, with the economy in the place that it is, investors are shying away from riskier investments. “A greater issue for investors now stems from the price volatility seen around IPOs such as Facebook in the US, which has left investors more cautious about valuation. There are lingering concerns around overvaluation.” (Barnes, 2014). With that, investors are looking for sure-fire investments when it comes to technology firms. With this ‘boom or bust’ type view, investors may be turned away by an IPO. In addition, the technology sectors are constantly evolving. These continuous changes may intimidate an investor. “Understanding which tech market sectors are most likely to outperform others is a critical component of an investor’s decision making and research process” (Sill, 2012).
While there have been a number of tech startups that have gone public and succeeded (Twitter, LinkedIn), there have been just as many that have attempted and failed. Investors just seem to not be interested. “Institutional investors have consolidated to a point that some of the biggest firms, such as T. Rowe Price and Fidelity, manage funds with hundreds of billions of dollars in assets.” (Helm, 2012). With that, while much attention is paid to a large IPO such as twitter or facebook, smaller tech IPOs struggle to make waves. With less support from the underwriter, comes less attention paid by investors, which may cause the IPO to be a waste. With this, there has been a shift it what tech companies are willing to go public from the previous decade. With the dot com era we saw significant amounts of tech companies going public on a whim. They saw potential, and simply went for it. However, the dot com bubble along with the large disappointment from the Facbook IPO, investors simply aren’t thrilled about tech companies unless they are a slam dunk. While the intrigue still exists for highly anticipated tech companies, the small IPO intrigue is out the window.
Simply because the market doesn’t urge tech companies to go public, does not necessarily mean that tech companies think that it is in their best interest to do so. In fact, companies feel that going public may hurt their firm from a business standpoint. “The minute companies go public, they are less competitive. You need a lot of creative, people” (Thompson, 2014). This quote comes from former CEO Alex Karp. He goes on to mention that when a company goes public, the investors don’t necessarily see eye to eye with the creative, which causes even more problems. In addition, he notes that going public may cause individuals to focus on money as opposed to the problem the technology is attempting to solve. Such thinking can change the direction a firm is attempting to go.
The trend of not going public is not an extremely new trend in the world of technology. In fact “472 companies represented the cream of the crop within VC and private equity portfolios [in 2013]. Now just a year later, 57 of the firms on the 2013 Tech IPO Pipeline have exited via IPO or M&A for an aggregate disclosed exit valuation of $44.4 billion.” (CB Insights, 2014) Of those 57 firms that exited from the private sector, only 21 were successful in going public. Considering that these companies are the cream of the crop, these statistics are not the least bit settling for a tech company considering going public.
The aforementioned trends and statistics lead towards a strong indication that the current market does not appeal towards an IPO. Thus, companies must look for other sources to infuse capital in their firms in order for them gain power in the market. Though there are a number of options, the ideal method is through acquisition. Acquisition allows a firm to infuse capital without the risk that an IPO. More importantly, if the current market is not conducive to an IPO, such as it is now, this is the ideal method of capital infusion.
Barnes, D, 2014. Technology IPOs: where to launch?. Global Financial Intelligence.
CB Insights , 2014. 2014 Tech IPO Pipeline Report. CB Insights , 1-10.
Helm, B, 2013. Thinking of Going Public?The market may love LinkedIn and Pandora, but chances are, it feels very differently about you.. INC., 0-0, 0-0.
Sill, I, 2012. Technology IPOs Taking Center Stage. Financial Executive : Tech Strategy.
Thompson, C , 2014. Free advice: Don’t go public, says Palantir’s CEO. CNBC, 1-5