Saturday, January 14, 2017

(The Big Disrupt) IPO: Why 2017's IPO market may look similar to 2016's

2016 was a dud year for the IPO market but Wall Street is particularly bullish about the prospects for IPO's in 2017 as they expect a number of unicorns (companies with a private valuation over $1 billion) to go public but Wall Street's expectations of a better 2017 seems based on hope than anything else. 

Who could blame Wall Street analysts and banks for hoping for a better IPO market this year as last year banks resorted to spending a whopping $85 billion in risky block trades  in the face of the worst IPO market since the crisis.  

Investment bankers and analysts  point to a number of companies planning go public next year as well as markets stabilizing after a turbulent year in 2016. However, Wall street's hopes for a better IPO market in 2017 are almost certainly going to be disappointed. 

While there is a steady stream of IPO ready companies and a strong demand for new blood in public markets, these companies have other options available to them to raise money under terms that are an awful lot more favorable than a IPO. A company going public means it becomes more subject to external scrutiny and more importantly, pressure from shareholders and analysts to meet quarterly expectations and focus on increasing shareholder value. Companies like Uber who can raise billions of dollars in the private market are prepared to wait before they IPO as they've seen  the pressure to meet quarterly expectations and increase shareholder value ruin many exciting startups in recent years from Groupon to Twitter. 

With this in mind, founders are more than happy staying private as they're not strapped for cash and the focus among VC's is growth based rather than current or future profitability. The only reason that unicorns like snapchat and Spotify look almost certain to go public in this year is because they're both in competitive markets and need the cash to compete in their marketplace due to presence to players considerably larger than they are. 

This should be bad news for VC's as traditionally IPO's have been a way to for VC's to make bank on their investments but with the IPO market in bad shape, M&A has been a solid market for VC's as tech M&A's made up for most of the activity in the total global M&A market for the last two years running.    

This run is likely to continue as companies, particularly in the tech sector, are flush with cash and are willing to use it to buy startups that helps them enter into new markets, improve or add to their current product or service, or simply consolidate their position in the market. Another and particularly important reason why this run is set to continue is that the tech M&A market is nowhere near as regulated as the IPO market which means there are less obstacles in the way of large exits for VC's 

The upshot of all this means that save the very possible IPO's of Snapchat and Spotify,  2017 will look a lot like 2016 as the IPO market spends another year in the doldrums. 

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