Therese Poletti's Tech Tales: What startup will try to thaw the tech IPO freeze?

The tech IPO market is officially frozen. Now, we wait for the thaw.

Data issued by Renaissance Capital earlier this week confirmed that yes, the market for tech IPOs is really as bad as it seems, getting off to a nonexistent start this year. The combination of extreme market volatility and the disconnect between startup valuations and Wall Street expectations have closed the window for tech IPOs, for now.

According to research firm Renaissance Capital in Greenwich, Conn., which also manages IPO-focused ETFs, not a single venture-backed tech company went public in the first quarter, the slowest start of the year since the Great Recession.

“The U.S. IPO market in the 1Q16 hit its lowest levels since the depths of the financial crisis in 2008/2009,” Renaissance Capital said in a report.

“There is no arguing with the data, it’s been a little quiet,” said Lise Buyer, founder and principal of Class V Group, an IPO advisory firm. “From an IPO perspective, March came in like a lion. The problem was, it was Cecil,” she added, referring to the lion lured from an African sanctuary and killed by an American dentist last year.

With the market for tech deals frozen, young companies will be on the sidelines, waiting to see which one dares to be the first to dip its toes into 2016’s icy and potentially turbulent IPO waters.

“There is a sort of everyone looking around to see who will reopen the pipeline,” said Rick Kline, a partner in the Menlo Park, Calif. office of law firm Goodwin Procter LLP who focuses on IPOs, venture finance, M&A and other areas of securities law. “I think some tech company will try to access the IPO market in either April or May. May could be more likely for a calendar-year-end company that drops their March quarter into their S-1 and then markets the deal.”

The last time such a big lull in tech IPOs occurred was in 2008-09, when two VC-backed companies helped break the tech IPO freeze: Network management software firm SolarWinds Inc. and online restaurant reservation service OpenTable Inc. SolarWinds went public in May 2009, the first venture-backed company to go public after a bleak seven months. Soon after that moderately successful deal, OpenTable went public at $20 and its shares soared 72% in its debut.

OpenTable, a survivor of the dot-com crash of 2000, was purchased by Priceline Group Inc. PCLN, -2.13%  in 2014 for $2.6 billion, more than five times its IPO price, and earlier this year, SolarWinds went private in a $4.5 billion deal led by Silver Lake and Thoma Bravo LLC.

But unlike 2009, today’s tech startups have been stamped with overzealous valuations concocted by companies and their private investors, creating far too many startups valued, at least on paper, at $1 billion or more. These frothy “unicorn” valuations on the private markets have not proved sustainable on Wall Street. One of the most recent examples is mobile payments provider Square Inc. SQ, +1.73% which had a $6 billion valuation at its last fundraising in 2014 but was valued at roughly half that amount in its 2015 IPO. 

Kline said that beyond the volatile markets and private/public valuation discrepancies, there is a fear that the first startup to break the logjam will have to pay a price.

“The first one that comes will have a strong likelihood of success, priced at a slight discount,” he said. “But you get a lot of marketing bang.”

Waiting has its own price, though: Unicorn status is going to become an albatross for these companies as they look to go public. It may have been nice, while they were private, to be awash in other people’s money and claim you were valued at more than $1 billion, but the public markets will not have the same patience for heavy losses and growth at any cost. Some VCs and other investors may be under pressure to keep on funding their investments, if the companies’ financial statements are not yet presentable for a public debut.

One likely candidate to break the IPO freeze, Nutanix Inc., a cloud computing company valued at $2 billion, seems to have gotten gun-shy. In a bit of odd timing, it filed its prospectus on Dec. 22 for an IPO that seeks to raise $200 million, but since then, Nutanix has been sitting on the sidelines. Since its original filing with the Securities and Exchange Commission, markets have seesawed dramatically. It’s also worth noting that Fidelity, a late stage investor, included Nutanix in recent markdowns of its startup investments.

A Nutanix spokesman declined to comment on its IPO process.

Other potential contenders to take the plunge are several tech startups that have started the process by filing confidentially with the SEC, according to Renaissance Capital. These companies include Line Corp., a Tokyo-based smartphone messaging app developer popular in Japan; Okta Inc., developer of a single sign-on and identity management software; Twilio Inc., a cloud-based platform that lets developers easily add mobile messaging and voice in apps; Coupa Software Inc., a cloud-based procurement system that helps companies save money; and Aquantia, a rare semiconductor startup working on high-speed chips for networking with backing from Cisco Systems CSCO, +0.04% Intel Corp. INTC, -1.10%  and Xilinx Inc. XLNX, -0.92%

None of the companies sited by Renaissance would comment or respond to queries for comment.

Many companies are not exactly eager to go public, while some don’t have an apparent need for more cash. Travis Kalanick, Chief Executive of Uber, told CNBC earlier this week that an IPO was not likely anytime soon for the heavily funded ride-hailing app company. “I’m going to make sure it happens as late as possible,” Kalanick said.

In its latest financing round, Uber, which has raised over $10 billion in financing and debt, had a recent valuation of $62.5 billion. And in a move that might be seen as trying to push a company to going public, music streaming-startup Spotify did a deal raising $1 billion in debt, with promises to its new investors specifically tied to an IPO, according to The Wall Street Journal

The second-quarter corporate earnings season, starting in April, will likely play an important role in whether or not any of these or any other companies begin the IPO process. But regardless of how earnings reports fare, it will take a tech startup with a strong backbone to jump onto Wall Street right now.

“We need somebody who is very confident and in a very good position to be the bellwether,” Buyer said.

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