It’s not often you see all five of the same week’s IPOs experience material uplifts on their public market debuts. Even sparser is a group of entrants that concurrently finish their first day of trading at 30%+ premiums on their listing prices. But on Friday, 27 April, unicorns DocuSign and Smartsheet joined three other equity listings in another display of the strength of public markets this year. Their debuts, along with Carbon Black’s the week after, brought 2018’s tally for unicorn exits into public markets to 8, 4 more than the same point last year.
A Good Year for Tech IPOs
However, quantity of listings compared to last year was not what was grabbing the market’s attention. DocuSign and Smartsheet’s share prices closed up 37% and 30% respectively on their first day of trading, joining all but one unicorn listing this year in positive public market returns. Zscaler kicked off the year for the cohort in impressive style, as the cloud-based security network saw its share price more than double in its first day to close up 106%. Dropbox, the former poster child for overvalued private rounds, followed in March with a defiant 35% share price uplift during one of the worst days for equity markets in that quarter. In doing so, it avoided a down round from its prior Series C post-money valuation of $10.5bn. Bilibili IPO’d the week after and is the lone unicorn so far in 2018 to evade a positive return in public trading. The China-based mobile gaming and video sharing platform priced its ADRs within the range at $11.50 before fizzling to $10.85 at the close of trading.
Spotify’s Direct Listing
It took only a week, however, before the IPO market had its next company to champion, as music-streaming pioneer Spotify completed a novel direct listing on the New York Stock Exchange. In a debut that brought with it a concern for the side-lined Wall Street collective, Spotify declined both the opportunity to raise additional equity capital and the normal market-making safeguards of a traditional IPO, listing with an NYSE reference price of $132 before finishing the day at $149 and change. The corresponding market capitalisation of $26.5bn was an impressive uplift on the $20.7bn price tag attached to the company following its Series H raise from Tencent Holdings, a round that prompted many commentators to voice concerns of overvaluation. Zuora, the billing management platform and early pioneer of the subscription economy, listed a week later on 12 April above its indicative range at $14 before climbing 43%. Hot on the heels of DocuSign and Smartsheet, and in its own cohort of 8 listings in the same day, cybersecurity firm Carbon Black brought up the rear with an equally buoyant 26% first-day pop.
The positive reception from public markets for unicorns this year has only been second to the hospitable welcome the technology sector has enjoyed. IPO proceeds are at a three-year high, and of the $16bn already raised from equity issuance at listing, 40% of that has come from technology listings; more than twice any other industry. SaaS unicorns like Zscaler and Zuora have a large part to play in that; recurring, predictable revenue models allow for conventional estimations of value in contrast to the guessing game that passes all too often for some unicorn verticals.
“One component from an investor standpoint is the predictability of the revenue because it’s a subscription-based business. That was a piece that was underlying a lot of our conversations.”
Dan Springer, CEO DocuSign
Money on the Table?
It’s in contrast to a mixed year of IPO performance from the 2017 cohort of unicorns. Only six managed an exit into public markets in the first half of that year, already less than 2018’s fast-increasing tally. Of even greater comfort to the venture world is this cohort’s improvement upon private market valuations at listing, which has yet to send a warning sign of Cloudera or Tintri’s size from last year. Dropbox is the sole unicorn in 2018 to price at a down round on its debut; a deficit of 21% that its first day uplift of 35% helped correct quickly.
Impressive uplifts, private or public, still raise one key question: how much cash is being left on the table? It’s a worthwhile discussion for the growing class of 2018, who despite raising $2bn and change in just six listings have left, cumulatively speaking, another $860m wanting. Potentially a small price to pay for a successful market debut and inevitably happier investors in the long run. That said, Zscaler raised $192m of net proceeds and is estimated to have left $204m on the table.
Cash-laden table or not, the IPO market is by all appearances in good health with an appetite for more. That is truer still for technology businesses with valuation-friendly revenue models, for whom the success of their now-public peers will only serve as a tempting invite to an IPO window most certainly open for business.
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