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Lessons From 2019's Tech IPOs (Filed #008)
What did we learn from the public market's tolerance of tech? Plus, a look at the unpaid human editors making Waze better and how to fight lies, tricks, and chaos online.
Ken asked me to write a bit about the 2019 IPO cycle. After the WeWork fiasco, I expected the IPO window to slam shut as the startup market figured out what everything was worth, but as it turns out there are still two offerings yet to come. Tech shops Bill.com and Sprout Social have set IPO price ranges and are each expected to debut this calendar year.
Bill.com, a B2B payments platform, should start trading on the 12th. Sprout Social is more of a mystery. Perhaps the week after.
I won’t bore you with their financial results (check here, and here for more if that’s your thing). I bring them up to provide bookends of a sort to a wild IPO year. 2019 saw a goodly number of tech flotations, some of which went well in the end.
Many did not.
As our goal is to summarize and to use sufficiently few words as to keep Ken happy, let’s talk themes first, and specifics second. In that vein, here’s the theme-list as far as I can make it, thinking as broadly as we can about US-listed technology, and tech-ish IPOs from the year:
SaaS does well: Software as a service companies, better known as SaaS shops, had a good year. The market category enjoyed revenue multiples as a cohort, helping its IPO-ready members cross the public-private threshold in reasonable order. However, while many companies in the space did well, not all enjoyed perfect launches.
Some optimism had to go: Slack’s direct listing, a critical plank of the 2019 IPO crop, was both a rousing success and a failure. It succeeded in getting Slack public with what appeared to be minimal fuss. It failed in correctly pricing Slack. The company shot out the gate above its reference price, and then slowly deflated. It was embarrassing, and, I presume, dispiriting for employees. However, the company is still richly valued and growing nicely. What happened was that the firm’s early pricing was simply wrong. And getting closer to its real value sucked. Optimism here got ahead of fundamentals.
Tech-ish companies struggle: Companies more tech-enabled than tech-first had a choppy year. You can tell how tech-ish a company is by its gross margins. The higher they are, the more tech-y it is. (This is a rough rule). And, the more tech a company can claim to be, the more it’s worth. That’s because higher-margin revenue is worth more than lower margin revenue. That seems simple, but Uber and Lyft and others ran face-first into that reality when they debuted. Private optimism was met with public skepticism, and the result was falling share prices and expenses write-downs.
This teaches us a lesson: Simply that if your company is valued like a software business, but lacks the gross margins and revenue regularity, you are going to struggle to defend your valuation when you go public.
Also, China-based offerings struggle: Finally, there were a bunch of China-based, U.S.-listed IPOs this year. They often struggled.
Of course, WeWork happened as well, but as that company only managed to try to go public, it doesn't meet our criteria.
Back to Bill.com and Sprout Social, they are the perfect companies for 2019’s IPO cycle to conclude with. Why? Because the two software-ish companies will detail how much the public markets value growth. Bill.com is growing more rapidly than Sprout Social, which means we’ll be able to get a good lever on the IPO appetite for two companies that lose about the same amount of money.
2019 was a year that separated the software companies from startups who were merely pretending. Expect this lesson to be learned yet again in 2020.
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