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The public crash and burn of WeWork’s initial public offering and poor early performances from high-priced startups that actually managed to go public in 2019 likely won’t stop other “decacorns” from testing the IPO market in 2020, but it may change how they do it.
Some of the biggest “decacorns” — startups valued at $10 billion or more on the private markets — made it to market in 2019 as expected, but there are still others that waited and watched an uneven performance by their peers. Highly visible consumer brands like Uber UBER, -1.43% , Lyft LYFT, -5.10% and Pinterest Inc. PINS, -2.06% helped drive up the average deal size, though their stock performance has been lackluster at best.
Still, experts are calling for another strong IPO market in 2020, especially during the first half, to follow up a year with the highest average deal value since 2012. While the total deal count of 195 fell short of 2018’s total, the average size of deals in 2019 crossed the $300 million mark for the first time in seven years, according to data from PricewaterhouseCoopers.
There are expected to be differences, however. In short, companies are now likely to be mindful of the “WeWork effect,” said Phil Haslett, chief revenue officer at EquityZen, a marketplace for pre-IPO shares. “There’s more focus on profitability, less on outright revenue growth, and more focus on corporate governance.”
He said investors will be drawing greater distinctions between real tech companies and “tech-enabled” businesses such as Uber, Peloton Interactive Inc. PTON, +2.56% , SmileDirectClub Inc. SDC, -3.18% and WeWork, which was taken over by SoftBank this fall and forced to shelve its IPO plans.
For more: WeWork is a symptom of a disease that may not have a cure
The reckoning for “decacorn” names offers some lessons for companies thinking of going the IPO route. “There used to be a time 10 years ago when no one talked about profitability,” Previn Waas, Deloitte’s national IPO services leader, told MarketWatch. “Now the path to profitability has to be immediate or very near term, like six to 12 months into the future.”
While much of the focus in 2019 was on laggards like the ride-hailing companies and the WeWork blowup, there were plenty of successes as well, such as Beyond Meat Inc. BYND, -1.97% . Some of the year’s stars were software names, including Crowdstrike Holdings Inc. CRWD, +2.27% and Zoom Video Communications Inc. ZM, +0.23% . Bill.com Holdings Inc.’s BILL, -4.28% pop after a mid-December IPO indicates continued appetite for newly public software names, which could prompt more peers to join the party.
A tilt toward companies with recurring revenue streams makes software-focused unicorns seem like attractive candidates heading into the new year, with names like Stripe on many short lists. Deloitte’s Waas said consumer names may consider “right-sizing,” narrowing down on focus or geography, to prepare for the heightened scrutiny they might face if they tried going public.
The higher barometer for public life might force some companies to consider other options, said Will Andereck, a director with Union Square Advisors, including a sale.
“Oftentimes, people might use the listing of an IPO as a way to signal M&A interest,” he said. “Sometimes, companies get too big or the valuation gets too high that it doesn’t become interesting enough for corporate buyers to want to pursue,” meaning more businesses may choose to sell themselves earlier.
Read: China’s answer to WeWork files for IPO and it feels like deja vu all over again
While the direct-listing concept has gained more attention in recent years, with Slack Technologies Inc. WORK, +0.95% and Spotify Technology SA SPOT, -2.19% opting for that non-traditional route to the public markets, it’s still not an option for the vast majority of companies since it requires they don’t have a need to raise capital. Airbnb has reportedly expressed interest in a direct listing, and the company recently declared its “intention to become a publicly traded company during 2020.”
The New York Stock Exchange proposed creating a form of direct listing that would let companies still raise funds through the process, but the Securities and Exchange Commission turned it down in early December. Still, the attempt shows that there’s “unmet need” for the direct-listing concept, said EquityZen’s Haslett, who expects to see a few more direct listings in 2020.
There’s some debate on whether the upcoming presidential election will cool the IPO market in the latter part of the year. “Companies we’re talking to and are working with are looking at last year and saying either ‘get out before June’ or ‘shut down until after the election,’” Deloitte’s Waas said, with both summer vacations and political uncertainty factoring into those decisions.
But PwC’s U.S. head for IPO services, David Ethridge, said that sort of thinking seems “overdone,” if history is any indication. “Look back to the 1990s, and with the exception of 2016 with the saber-rattling on biotechs, [elections] have been a nonevent on IPO activity,” he said. “Maybe they don’t price the Tuesday, Wednesday, Thursday of that week, but historically they haven’t really impacted overall volume.”
Here are some major names and themes to watch for as 2020 approaches.
Airbnb
The home-sharing pioneer issued a one-sentence release earlier this year in which it declared that it “expects to become a publicly traded company during 2020,” fueling further speculation that the company will try a direct listing. The company has disclosed that it was profitable on the basis of earnings before interest, taxes, depreciation, and amortization (Ebitda) in 2018. Airbnb is now trying to move beyond its core business, promoting experiences like cooking and language classes for customers. It’s also “powering” two apartment communities in the U.S. designed for renters who want the flexibility to easily list their units on the platform for any period of time. The company was valued at $31 billion through a 2017 funding round. A spokesman declined to comment beyond the September release.
Stripe and the fintech candidates
Stripe surpassed Airbnb as the most valuable private company in 2019 thanks to a valuation of $35 billion as of a September 2019 funding round. The company sits in the hot intersection of payments and software, working with companies such as Lyft, Uber and Glossier on payment processing, payouts to contractors and card issuing. E-commerce sales are picking up, and Stripe “does the back end for those kinds of businesses,” riding the rising tide of the online economy, said Santosh Rao, head of research and a partner at Manhattan Venture Partners.
The company has been expanding geographically and adding new enterprise capabilities as it goes up against companies such as PayPal Holdings Inc. PYPL, -1.31% , Square Inc. SQ, -3.13% and Adyen NV ADYEN, +0.36% . Though co-founder John Collison told CNBC earlier this year that the company had “no plans” for an immediate IPO, the company still cracks Rao’s short list. A Stripe spokesman reiterated in an email that there are “no plans” for the company to go public.
There are two other fintech names on Rao’s list: Klarna, which powers installment-payment options and nabbed a $1.4 billion valuation on the private market back in 2014, and Toast, which makes payments products for restaurants and fetched a $2.7 billion private valuation in early 2019. Klarna did not respond to a request for comment, while a spokesperson for Toast said the company was “laser focused” on building its platform. “There are many ways to finance a business with this much momentum, and an IPO is certainly something they will consider as one of those options as time goes on,” they said.
MKM Partners analyst Rohit Kulkarni also thinks that some fintech companies could take the plunge this year, adding five names — including Stripe — to his list of 20 2020 IPO candidates. The other four were mobile stock-trading app Robinhood, credit company Avant, online lender SoFi and crypto-focused Coinbase.
A wave of software
Many of the software companies that saw IPO success in 2019 didn’t have name recognition, but they did have something more valuable: sticky revenue and better profit profiles. “As infrastructure for companies has moved to cloud, a lot of companies that sell software to enterprises who have everything in the cloud are going to perform really well,” EquityZen’s Haslett said. He has his eye on Snowflake Computing, a cloud-based data-warehousing solution that nabbed a $3.5 billion private valuation a year ago. A spokesperson for Snowflake said the company has “nothing to add at this time.”
MKM’s Kulkarni put Snowflake on his list as well, along with four other software-as-a-service startups: Databricks, Zenefits, Tanium and UI Path.
Plenty of private software companies are proclaiming $100 million in annual recurring revenue, which is a good sign they are aiming to go public. Also, keep an eye out for any startup slashing payroll and expenses as a sign they are getting the ship in order for a filing.
Palantir
Another year has come and gone without a Palantir offering, but the highly secretive software company cracks the list once again, at least as a key name to keep an eye on. The company has reportedly been trying to seek out private funding from overseas, which could delay an anticipated IPO by a few more years, but Rao said investors “can’t rule out” a 2020 debut. “People are saying it’s going to get pushed out two to three years, but it’s one of those things where it’s ready, it’s highly valued, but we still don’t know when” an IPO would take place, said Rao, whose firm is an investor in Palantir.
Were the company to file for an offering in the year ahead, it would likely face scrutiny for its services to the Department of Homeland Security and other government agencies. The company was last valued at $20 billion in an October 2015 private round. Palantir did not respond to a request for comment.
Delivery giants?
This past year proved quite the eye-opener for food-delivery businesses, as the competitive rush finally caught up with GrubHub Inc. GRUB, -1.55% and sent its stock tumbling. GrubHub’s management decried the “promiscuous” nature of diners who failed to show loyalty to any one food-delivery service, and Uber vowed to rethink whether its Eats business belonged in geographies where it was unlikely to become a market leader. Will that backdrop scare off companies like DoorDash, Instacart and Postmates?
“There are going to be exits either through IPOs or M&A,” said Rao, whose firm has a Postmates stake.
This past year already witnessed some merger activity, with Square selling its Caviar business to DoorDash and British food-delivery company Just Eat serving as the subject of a bidding war.
A Postmates spokesperson said the company has nothing to share on IPO plans, while DoorDash did not respond to a request for comment.
