As the IPO Market Heats Up, A Look Back At The Source Of Its Deep Freeze

When Dropbox went public last week in the first major tech initial public offering of 2018, a number of people were thinking, “It’s about time.”

The company’s public debut was hotly anticipated in an environment where tech IPOs have not been common.

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In recent years, a handful of high-profile unicorns were expected to go public but didn’t. Airbnb, Spotify, Palantir Technologies, Stripe, Pinterest and Uber Technologies, for example, have all been on “most anticipated IPOs” lists going back as far as 2014—if not longer.

But despite continued success, these tech companies have all opted to stay private. And most have since raised large sums of venture capital or private equity.

That’s not an uncommon practice if you look at what other startups have done historically. Online file sharing startup Box in April 2014 delayed its IPO and went on to raise $150 million that July. It went public in January 2015, and despite some ups-and-downs, the cloud storage has found itself on successful footing.

Steeped In Anticipation

To better understand just how much wealth is waiting for an exit, let’s take a quick look at some of the companies who have long been rumored to be eyeing an IPO and their status.

Airbnb

Since 2014, Airbnb has raised upwards of $1.58 billion from investors such as Sequoia Capital, Andreessen Horowitz, and TCV. As of November 2017, it was valued at an estimated $31 billion. In March 2017, CEO Brian Chesky told Fortune that he and his team were “working on making sure the company is ready to go public,” a process he estimated would take about two years. In February 2018, Airbnb’s CFO was reported to be leaving the company amid reports of increasing tension with Chesky. And if there was any doubt, Chesky cleared things up in a company statement.

“We are not going public in 2018. Our primary focus is becoming a 21st-century company and advancing our mission,” Chesky wrote. “We’re working on getting ready to go public and we will make decisions about going public on our own timetable.”

Uber

Uber has raised nearly $21 billion since 2014 from investors such as Foundation Capital, Warburg Pincus, and Altimeter Capital. The ridesharing company’s valuation is said to have dropped by at least 30 percent last year to about $48 billion after a $1.25 billion investment from SoftBank. However, much of that drop was the resulting sale of secondary shares. In February, Recode reported that the settlement between Alphabet’s Waymo and Uber valued the company at $72 billion.

Although Uber is reportedly actively preparing for an IPO, the company is still not profitable, and its CEO doesn’t expect it to “be profitable before 2022,” according to Bloomberg. The company pulled in near $11.1 billion in the 2017 fourth quarter, an increase of nearly $1.4 billion over the 2017 third quarter, which saw the company bring in $6.9 billion in revenue. Uber lost an estimated 12 points of U.S. market share over the course of 2017 to Lyft. On top of that, the company is dealing with government investigations, sexual harassment accusations and increasing number of competitors. Plus, it’s still looking for a CFO.

Pinterest

Pinterest has raised more than $900 million since 2014 from investors like Bessemer Venture Partners. A December 2017 report speculated that the visual bookmarking tool maker would delay any IPO plans until 2019 after it missed its more than $500 million revenue target for 2017. The social network was reported to have losses of about $100 million on revenue of about $490 million. As a result, Pinterest wanted more time to justify its $12.3 billion valuation, according to The Information.

Palantir Technologies

Palantir Technologies has raised more than $1.6 billion since 2014 from investors such as by Peter Thiel and the Central Intelligence Agency’s venture capital arm called In-Q-Tel. The software and services company has a reputation for being tight-lipped so it’s not saying much about whether it plans to go public. With a valuation of an estimated $20 billion, some speculate the company believes it’s better off staying private. It reportedly was not profitable when 2017 began.

Spotify

Swedish commercial music streaming service Spotify has more than $2 billion since 2014. In December 2017, a MarketWatch report said the company was more likely to get the green light from the SEC for a direct listing, as opposed to an IPO. This would mean that Spotify would go public but wouldn’t raise money or use underwriters to sell its stock. In March, Spotify did just that. The company is expected to debut on the New York Stock Exchange on April 3 under the ticker symbol of SPOT. This week, RBC Capital Markets issued a report estimating the company’s value at $43.5 billion – way higher than the $8.5 billion it was valued at just one year ago. The company reportedly doubled its losses in 2017 despite a 39 percent increase in revenue.

Thawing Out

There’s some speculation that disappointing performances from Snap and Blue Apron in 2017 may have scared off some companies last year. And that may have been the case.

“Snap set the tone for the year when it comes to big companies,” noted Barrett Daniels, CEO and co-founder of Nextstep Advisory Services out of Burlingame, Calif.  “They saw what happened to Snap, took a step back and looked in the mirror and said, ‘We need to be better than this. The public is not going to fall for a big name or revenue growth. We need decent fundamentals.’”

But the lack of IPOs in recent years can likely be traced back even further to when the JOBS Act was passed into law in 2012, according to Daniels.

The act was designed to encourage small business and startup funding by easing federal regulations and allowing individuals to become investors. Before that, companies had to present financial information if they had 500 shareholders of record as if they were public companies.

“This pushed companies like Google and Facebook to go public, because they were so close to breaking those thresholds,” he added. “But once the JOBS Act was passed, it gave some of the other high-flying and dynamic pre-IPO companies some breathing room. It’s a fact that it’s significantly easier to run a company while it’s private than when it’s public. There’s no comparison.”

Another reason so many companies have opted to stay private? The abundance of capital available to them in private markets.

An IPO used to be a capital-raising event, Daniels pointed out.

But when hundreds of billions of dollars have been made available to these startups, there just hasn’t been as much of an incentive.

“With the likes of SoftBank throwing money around, the only real pressure these days to go public is from employees who want to cash out and move on or start their own companies,” he said. “Only recently is VC pressure playing a role in some of these companies coming to market as these startups mature and get closer to the 10-year mark.”

New Enterprise Associates (NEA) Partner Amit Mukherjee agrees.

“There’s been enough capital available to startups so they really didn’t need to go public,” he told Crunchbase News.

But that doesn’t mean they won’t ever go the public route.

“If you were to ask me a year ago, I would have thought this was the new normal and that we may never go back,” Daniels said. “But just as Snap—and Blue Apron—set the negative tone for last year, the Dropbox IPO is setting a positive tone for 2018. It might have changed a lot of companies’ minds.”

Mukherjee thinks so too.

“A number of those companies will go out,” he said. “The public markets are much healthier now. It’s a much more robust time in the public markets. But private companies are learning from those that have gone public before them—as some have been rewarded and others punished—and are applying those lessons to be in a stronger position if and when they do go public.”

In a June 2017 post, Andreessen Horowitz outlined detailed thoughts on where all the IPOs have gone. The firm pointed out that about two decades ago we saw about 300 IPOs per year. Since then, it estimated that average has declined by more than half. We could go on and on about why this might be the case. But when you get down to it, isn’t quality more important than quantity?