Taken at face value, there’s little to recommend 2020. For the most part it feels like a year we’d all like to move on from as quickly as possible. Along with the pandemic itself, we’re well aware of the economic struggles playing out at the moment, with an ensemble cast of sectors that find themselves running to catch up with a new reality.
But what’s interesting is that (bear with us) it’s not all bad news, at least in a broader sense. For one thing, it seems to have slipped under the radar that after the sharp dip around March, the economy has rebounded reasonably well. The S&P 500 is up 50 per cent from its low point and it’s ahead on year to date too. We’re by no means out of the woods, as the new tier system of restrictions shows, but elsewhere there are positive economic stories to be found.
One of these lies in the tech sector, which is experiencing an upswing in the number of companies going public.
IPOs and their alternatives
When we think of a company ‘going public’ we generally think of an Initial Public Offering (IPO), in which a company issues new shares with the goal of raising capital to fund expansion. But an IPO isn’t the only way, another route that a lot of tech firms are taking is what’s called a ‘direct listing’. Companies that opt for a direct listing may not have expanding or the creation of new capital as their goals, instead they may be targeting other benefits of becoming a public company, like increased liquidity for existing shareholders. Unlike an IPO, in a direct listing no new shares are created and employees and investors can sell existing stocks straight away.
To carry off the direct listing approach, a company needs to be wealthy, already well known and have a business model that’s easy to understand. Why? Because if they’re going public in direct fashion, they need to have something people will be interested to invest in. As a general rule (rightly or wrongly) people are inclined to invest in companies they’ve heard of and understand, so direct listing is best suited to moneyed brands with a very strong identity, which as it happens, tech companies often have in spadefuls.
Brands you’ve heard of
Let’s start with a big name to illustrate that point. In 2018 Spotify, which is to music streaming what eBay is to online auctions, went public through a direct listing. It was a success – since opening at $165.90 (far above the reference price of $132), shares have continued to trade within a narrow range. A year later, Slack pulled off a similar coup and last month project management company Asana took the same route, opening at $27, significantly higher than the reference price.
Going public through a direct listing is popular with companies that don’t have to raise awareness about their brand or their offering. But there are other routes too. Another way of going public is through a ‘special purpose acquisition company’ (SPAC). A SPAC is a shell corporation created to take a company public without going through the traditional IPO process. It’s normally formed by investors with expertise in a particular sector to pursue deals in that specific area. The founders may have an acquisition in mind, but they don’t identify it, indeed investors might not know until the last minute what they’re investing in (earning the nickname “blank check company”). Recently the real estate tech company Opendoor and electric vehicle infrastructure company Chargepoint have signalled an intention to go public in this way.
IPOs still on the rise
That’s not to say IPOs are out of fashion. Quite the opposite. Cyber security stalwarts McAfee will carry out an IPO this year, as will fashion site Poshmark, and they’re just two examples of a stream of tech firms deciding to go public in the traditional fashion. Right now there’s high demand for software company services, driven at least in part by the changes to ways of working thrust upon us this year. In September cloud-based data-warehousing company Snowflake listed, as did software company JFrog, initially with a value of around $4bn, but now trading closer to $8bn.
It’s likely that these success stories will lead to more tech companies following suit in the coming months. Along with the new players, of which there are many, we may also see longstanding companies taking advantage of this window for however long it may stay open.
A new Dotcom boom?
How long that window remains open is an interesting question. Indeed, such is the forward march of tech that there have already been nods to a new ‘Dotcom boom’. However, there are some important differences to point out. For one thing, the number of IPOs is actually down year on year – 2019 saw 159 US IPOs, while 2018 saw 192. Given the overall strangeness of 2020, we’re unlikely to see a larger figure this year. In that sense, we’re hardly witnessing a runaway mania.
Second, the quality and reputation of the firms we’re talking about are very strong and so far their results are solid. Some of 2019’s tech stocks saw lukewarm performance, but 2020 has seen a number of success stories. Snowflake alone (the largest software IPO to date) is now worth $70bn. Third, tech has a habit of reinvesting its profits. An example is Palantir, a company founded by Peter Thiel, a member of the so-called ‘PayPal Mafia’, former executives who went on to further tech success. Thiel founded venture capital firm Founders Fund, which backed Airbnb among others. Reid Hoffman, also ex-PayPal, founded LinkedIn, while Jawed Karim, Chad Hurley and Steve Chen launched YouTube. Then there’s Elon Musk – well, we don’t need to tell you what he launched.
The point is, even though we may be seeing an enthusiasm for tech companies going public, and even though it’s like to spark others, we’re living in a time when software companies are financially stable, very well known to the public and, like Snowflake, in great shape to become giants. As we continue to point out to one another that we’re “still on mute”, keep in mind that amid the bad news of 2020, the future looks very bright for the tech sector.