Tech IPOs On The Rise?

Background

With the pandemic heavily affecting business, one sector has picked itself up rather quickly since March – technology. Tech stocks have reached all-time highs and investors are demanding more IPOs.

Why Go Public?

The technology sector sees several startups popping up every year. Some rise straight onto the headlines, whilst others go under the radar. To get to the top, many startups need to go public.

When a company goes through an IPO, they strengthen their capital base which would allow them to increase funding into their research and development (R&D), capital expenditure, or pay off existing debt. This enables the company to become stronger and produce a better product. In addition, a technology company has many sunk costs1. They allow the company to develop a strong product or service which they can then eventually release into the market. With more capital available and another source of financing in equity, the company will have a significant advantage.

Another advantage is the increased publicity and prestige. When a company plans to go public, they usually reach the headlines on business sections of popular newspapers. This, in turn, makes their products known to a new group of potential customers and even increase market share as a result.

How Has COVID-19 Affected Technology IPOs?

At the moment, there is a lot of investor demand to look at IPOs. However, the current landscape means that the way these are carried out will have to change. Previs Waas, a Partner focused on IPOs at Deloitte said “the window is open. Everyone has figured out that a virtual IPO is possible” [1].

Technology companies can be viewed as risky investments, especially since 2019’s technology IPOs disappointed (notably Uber and Lyft). During the pandemic though, the issues with the profitability of technology companies have been sidelined. Companies such as Vroom, a start-up that sells second-hand vehicles online, had a net loss of $143 million last year, yet went public in June with its share price doubling on its first day of trading and the company raising $495 million from the IPO [2]. Investors have observed that the virus has accelerated the adoption of technology like e-commerce, delivery, streaming and virtual learning. Gavin Baker, chief investment officer at Atreides Management, said: “COVID pulled the world into 2030.”

Meanwhile, Morgan Stanley has been helping companies affected by the pandemic find alternative financing methods. Colin Stewart, Morgan Stanley’s head of technology equity capital markets, said that the market was too volatile, with companies assessing how the virus changed their financial forecasts. Now, with the stock market stabilising, the situation has changed. Mr Stewart said that “it’s clear there is a lot of pent-up investor demand to look at IPOs.”

Not all companies that planned ongoing public this year may succeed, given how the economy is still recovering from the pandemic. EquityZen, an investment service that tracks IPOs, published a list of nine potential candidates for the year in early March. Four out of the nine have since laid off staff due to Covid-19. Phil Haslett, a co-founder of EquityZen, said: “if we wrote the list today, it would have a very different set of components” [1].

The window for IPOs right now seems to be quite small considering the high possibility of a second wave of COVID-related shutdowns which could send the stock market into another downward spiral. Companies also need to get through publishing second-quarter financials and there is also the US presidential election in November, which may create volatility in the market.

As a result, more companies than usual are aiming to go public in August, despite it usually being a quieter period.

A Closer Look Into How Vroom Negotiated the Adapted IPO Process

With everyone having to stay home, roadshows2 have to be done virtually. Mr Hennessy of Vroom held a virtual roadshow, where he took meetings with investors via teleconference from the comfort of his home. He said that he liked how efficient the virtual roadshow was, something which would have normally lasted two weeks across multiple cities.

On the day of Vroom’s IPO, Mr Hennessy and his executive team could not travel to Nasdaq, where Vroom was listing. Nasdaq had instead provided Vroom’s employees with an app to upload photos of themselves, which the exchange then displayed on its tower in New York’s Times Square. Mr Hennessy said that he preferred how it turned out to an in-person ceremony since everyone who works at Vroom got to participate by sharing screenshots of themselves on the tower. He said, “those Nasdaq moments are over in a few minutes with some confetti. This lasted a couple of hours” [1].

The IPO results were promising, with shares skyrocketing on their first day of trading. The IPO was priced at $22 per share with the stock closing more than 117% higher [3].

A Closer Look Into the Lemonade IPO

The mobile-based insurance startup, backed by SoftBank, went public on 2nd July with shares doubling during the first day of trading. Lemonade was founded in 2016, and it uses artificial intelligence and big-data algorithms to streamline the processes of buying insurance and filing claims. It aims to reimagine a legacy business for the world that exists now. The company originally priced shares at $29, slightly above its initial estimation of $26-28, but traded for as much as $64 on the first day, raising $319 million in the process and valuing the company at $3.8 billion. With the capital raised, Lemonade plans to spend on general corporate purposes and may also fund acquisitions. It became 2020’s best IPO debut even though the company is unprofitable with net losses of $109 million [4].

Investors believe that its combination of slick technology and new ideas about how to sell insurance will bring in the ranks of new customers. The top property and casualty insurance companies in the US were established around the time of the great depression and their product offering has not changed much since then. Lemonade aims to shake up home insurance with promises to use artificial intelligence to settle claims quickly and a business model that is designed to ensure that charities receive some of the benefits when payouts to customers are low. Chief executive, Daniel Schreiber said, “a lot of what we are trying to do is capture consumers young.” Lemonade has already expanded from renters insurance into cover for homeowners and is now eyeing other markets such as pet insurance [5].

Despite the significantly high barriers to entry in the insurance market, for example with the big four insurance companies spending upwards of $2 billion on marketing each year, some believe it is only a matter of time before businesses such as Lemonade overtake the giants. This is probable when considering that they are more efficient and can lower claims [5].

Conclusion

With more technology IPOs set to be announced over the next couple of months, the only way is up. Airbnb, the accommodation booking company, said it has filed with regulators for an IPO. Airbnb’s listing would probably be one of the largest this year. The company has been heavily affected by the pandemic due to the lockdown measures in place and had to raise $2 billion in emergency debt funding which significantly reduced its valuation. It has revived its plans to go public as it saw signs of a rebound in consumer demand [6].

More and more companies are looking to go public in the coming months to continue taking advantage of a surging stock market and avoid any upcoming volatility from the US presidential election in November. This, therefore, suggests that there are many more IPOs set to come as investors have more trust in technology.

Glossary

1 Sunk Costs: These are types of costs that have already been incurred and cannot be recovered, for example, money spent on new equipment [7].

2 Roadshows: These are when company executives go to various locations and pitch their company’s shares to investors leading up to an IPO [8].