It has almost become an article of faith that tech companies have gone off going public.
We saw an unprecedented amount of initial public offerings worldwide in 2014: 118 in total, according to a report by auditors PwC. However this was followed by a drop to 92 in 2015 and little suggests 2016 will see much of a boost.
However the story is far more complex than these figures suggest. While the US market clearly has seen a big downward trend, the UK is a little different.
We’re going to explore why some UK tech companies are opting not to launch on the stock market, provide some insight into how firms decide whether or not to IPO and explain where the UK differs to other markets.
Has the number of tech IPOs really decreased?
In a word, yes. The total number of IPOs dropped from 118 in 2014 to 92 last year.
However the picture is sharply different depending on where in the world you look. In the US the number of IPOs almost halved from 2014 to 2015 (from 56 to 31).
However in the UK the (admittedly much smaller) number actually increased over that period: from eight to 10. Asian exchanges have seen healthy growth in recent years, though turmoil in China’s stock market in 2015 dampened demand somewhat.
The fact the US is so dominant and accounts for the majority of IPOs distorts the picture: it is in fact a story of a drop in activity in the US but growth elsewhere, especially in Europe and Asia.
However the level of growth in the UK is still not as strong as might have been expected, according to Brian Henderson, a PWC partner in charge of its fast growth companies programme.
It’s also true that a number of tech companies that have seemed to be ready for an IPO have now got cold feet and are postponing their public debut.
That’s “primarily as a result of the current market conditions which have become much more conservative in recent years,” according to Vineet Jain, founder of file sharing firm Egnyte, which is nine years old.
“Where the old mantra was growth at all costs, driving record valuations and unprecedented numbers of tech‘unicorns, private and public markets are now demanding that companies prove they are either profitable or are on the path to profitability,” says InsideSales.com’s EMEA general manager Martin Moran.
Why are some UK tech companies choosing not to IPO?
Henderson suggests that the availability of capital has kept some UK tech companies away from going public.
“VC funding has been pretty buoyant in the last couple of years. And if companies are able to remain private but get enough funding, that benefits them. As soon as they go public they come under scrutiny from the press and are beholden to shareholders and investors,” he explains.
So there are the many burdensome factors attached to going public: pressure to forecast accurately, constant external scrutiny, the mandatory quarterly reporting system, the need to keep up the share price, to name a few.
This public regime – especially quarterly reporting - can affect the ability to think strategically or long-term.
There is also the pressure to keep up with (perhaps over-optimistic) valuations of your company, which are magnified when going public, according to Vinay Joosery, cofounder of six-year-old database company Severalnines.
“It’s hard to be self-critical and cut 20 percent off the valuation. But when others look at you, that’s when valuations come down. That’s the problem: to IPO you need strong metrics. It needs to make sense. It’s a measuring stick, you look at a business and ask what they’re really worth,” he says.
There is also the fact that IPO markets tend to just experience ups and downs along with the rest of the cycles of the financial world.
“There is a lot of uncertainty this year. There’s the EU referendum and elections in the US for example. I’d be flabbergasted if companies across the UK weren’t adopting a ‘wait and see’ approach at the moment. There will be a time lag for businesses to get back on track with IPO preparations or EMEA activity”, Henderson says.
How do tech companies decide whether to go public?
“When you lead a business, you are always considering whether to go public, raise more money or grow organically,” says Joosery.
The decision to IPO is based on a wide range of factors. These include timing (are market conditions favourable), industry comparison (are you in a sector that’s viewed well by investors), how willing the founders are to release control to public markets, and whether the company can raise enough cash privately, according to Jain.
The reason many companies do choose to IPO is to ensure the investors and founders get their pound of flesh. In terms of getting their money back for VCs, it’s either an IPO or an exit via a sale to another company, Vinay Joosery says.
Anyway, the real measure of success now is not whether you have gone public, but your valuation and whether it is over $1 billion, thus making your company a ‘unicorn’, he claims.
Some huge, high-growth tech ‘unicorns’ have decided to stay private, Uber being one of the most oft-mentioned examples. Yet they are viewed as highly successful. They also have no shortage of private investors queuing up to fund them.
In these cases “there is really no reason for them to take their company into a rougher public market,” Jain says.
In the current climate, the main reason a company would go public is if they need to raise money and can’t get a reasonable valuation from the private markets, or if their sector is generally viewed positively right now (for example the fintech industry in London), he explains.
“We don’t look at the IPO as the holy grail for success. What we do see as success is to build a business that is profitable and can sustain long term growth,” Jain adds.