An Initial Public Offering (IPO) is the process of offering shares of a private company to public investors through a stock exchange. There a several reasons for going through this long and heavily regulated procedure:
- IPOs give the company access to more capital, thus enabling it to grow and expand.
- Private investors can fully realise the gains from their investment as they may receive profits from share premiums.
- The increased transparency and credibility will help the company obtain better terms when seeking loans.
- Increase the company’s public exposure, reputation and relations.
2019 was a difficult year for technology companies. Many of the IPOs ended up being dud listings with big names like Slack and Uber proving unsuccessful. Furthermore, WeWork –previously known as the most valuable start-up in the US – was revealed to be entirely unprofitable after they filed to go public. The failure of several large companies spooked investors, leading to a 50% increase in IPO registration withdrawals during 2019. To make matters worse, the coronavirus pandemic in 2020 put a halt to economies around the world. As many industries suffered, the tech sector flourished from a burst of IPO filings.
There are various reasons for this flood of tech IPOs. Firstly, the first quarter of the year saw activity freeze in the stock markets. The listings of unicorn tech companies like Airbnb were postponed. Arguably, the freeze resulted in significant pent-up investor demand that was ready to be unleashed once markets stabilised in the second quarter. This has created an excitement for new listings.
Much of the fast-growing tech companies that have undergone IPOs are still loss-making, but it seems that investors have become more tolerant. This is because the pandemic has accelerated the widespread adoption of technologies like e-commerce, virtual learning, streaming and telehealth. In particular, companies that sell to businesses and do not have to subsidise customers are in high demand. They include companies like CrowdStrike and DataDog.
Some notable tech companies that have floated this year include:
- ZoomInfo (ZI), a company that sells access to its database of business contacts, floated on 4th June. It raised USD$1 billion on its first day of trading, bringing the company’s value to USD$13 billion. ZI was the first company to prove that locked-down investors could still produce a fruitful IPO.
- Used car selling platform Vroom Inc. (VI) rose USD$468 million after their IPO. After initially pricing its shares at $22 it more than doubled to $47.50 per share at the end of the first day.
- Lemonade, the insurtech pioneer that assesses eligibility for renters’ or homeowners’ insurance raised $139 million on its first day with share prices doubling.
These are but a few companies who have successfully floated on the stock exchange with many more planning to do the same in 2020; from videogame engine maker Unity to holiday rentals giant Airbnb, data analytics firm Palantir and productivity software manufacturer Asana.
The upsurge in tech IPOs along with large growth in big tech stocks might pique the interest of regulators. The tech sector is increasingly being seen as a way out of this economic crisis and governments want to ensure that the profits can be realised by the public at large. In fact, the notion of a digital service tax (DST) is being proposed on a global level. Another impact of huge tech market growth is less diversification. As of August 2020, tech stocks dominate 27% of the S&P 500s benchmark index. This could be a cause for concern for many investors if the bubble bursts or big tech companies like Facebook and Google perform poorly. Nonetheless, technology is seen as a way out of the effects of the coronavirus pandemic and will be part of the new normal.