People vote in the Michigan primary election at Chrysler Elementary School in Detroit, Michigan, on March 10, 2020.
Jeff Kowalsky | AFP | Getty Images
In most presidential election years, conventional wisdom says the IPO window closes by mid-summer so that companies avoid the shadow of the November contest, a time when markets can be jittery.
That convention doesn’t apply this year. The country is mired in the worst pandemic in a century and suffered its steepest-ever quarterly plunge in economic activity in the second quarter. Yet the equity markets are rallying, and tech stocks are trading at historical premiums.
In polls, Democratic candidate Joe Biden holds a commanding lead over President Donald Trump. Wall Street may like Trump, but it’s OK with Biden, who was vice president during much of the bull market, which started shortly after Barack Obama took office in 2009.
For high-growth software companies eyeing the public market, that means talks with bankers are quickly ramping up.
“We could find ourselves in a very strong second half here as we go into the elections,” said Jackie Kelley, Americas IPO and strategic transactions leader at Ernst & Young.
“We’re already seeing increased IPO activity over the last couple weeks. As long as markets stay stable, I think we have good runway to get a significant amount of this backlog out into the markets.”
In particular, investors are thirsty for resilient business models that have shown elements of being Covid-proof. The software industry has dozens of vendors, private and public, that are seeing spikes in demand from the sudden need to support remote workers and the faster-than-expected transition to the cloud.
The Nasdaq is up 23% this year and 60% since the index bottomed in March. Among the top performers are cloud software companies like Zoom, Fastly, DocuSign and Twilio, whose growth rates have held up during the shutdown.
Election jitters resolved with Biden’s rise
Neeraj Agrawal, a partner at Battery Ventures and an investor in software start-ups, estimated there could be 10 to 15 venture-backed IPOs for the remainder of the year, whereas previously the “expectation was there would be zero” in the last few months of 2020.
“People are no longer focused on the election on our side of the table because the investor side is so interested in new names that it doesn’t really matter,” said Agrawal.
Sandy Miller, a partner at late-stage venture firm Institutional Venture Partners, agreed with Agrawal that the election has become a virtual non-factor. Any concerns about a possible Democratic president were resolved when Biden became the presumptive Democratic nominee after Super Tuesday in March.
A week before Super Tuesday, the leading Democratic contender was Sen. Bernie Sanders, a self-described democratic socialist who has spent his career railing against Wall Street and promoting structural change.
David Ethridge, the U.S. IPOs leader at consulting firm PwC, said the election story was overblown heading into the year and was never likely to be pose a significant headwind to new offerings. Still, he said the stock market has been so surprisingly strong that companies are accelerating their plans. Ethridge said most companies that want to go public this year will aim for the pre-election period, because after that comes the holiday season with Thanksgiving and Christmas.
“I do see a rush right now to try and get in front of the election,” said Ethridge, who previously spent almost five years as co-head of listings at the New York Stock Exchange. “There’s recognition on the part of buyers and boards that the value in the market is really high right now. This is a good time to be a seller.”
In the pipeline
The pickup is already underway.
Rackspace, an IT services company that was taken private in 2016, filed its prospectus last month and started trading on Wednesday. BigCommerce, which provides software for e-retailers, debuted at the same time.
Between June and July, data collector Zoominfo, Chinese cloud software vendor Agora, insurance-tech company Lemonade, online car seller Vroom and Apple partner JAMF all debuted in the U.S. They all traded significantly higher out of the gate.
Bankers at Goldman Sachs, the leading adviser for tech IPOs since the beginning of 2019, said they’re seeing companies getting ready at a rapid pace with the markets continuing to rally. William Connolly, the head of technology equity capital markets at Goldman, said the process takes four to six months.
Those efforts “really began to re-accelerate about a month ago to six weeks ago,” Connolly said, meaning we could see some of those deals this year.
Airbnb, which has a very different business model and has been battered by the coronavirus pandemic, could still go public this year after downsizing and cutting costs. DoorDash and Instacart have seen their businesses surge from demand for food delivery, and are both eyeing the public markets, with DoorDash considering an offering this year, according to people familiar with the matter.
A DoorDash Inc. delivery person arranges an order in the back of a vehicle outside of a DoorDash Kitchens location in Redwood City, California, U.S., on Friday, Nov. 29, 2019.
David Paul Morris | Bloomberg | Getty Images
Other software vendors have the size and growth rate to go public now but are more likely to go out next year, including HashiCorp, Databricks, Confluent and UiPath, according to people with knowledge of their plans. They each have plenty of money after raising recent private rounds at valuations ranging from $4.5 billion to $10.2 billion.
“There are a lot of companies poised to go and most don’t need capital,” said Miller from IVP. He added that there’s an unprecedented number of venture-backed companies with $100 million in annual revenue “that are growing and have good IPO prospects.”
Miller said that one potential catalyst for IPOs is the withdrawal of SoftBank from the “super late-stage market.” After the collapse of WeWork’s IPO plans last year and Uber’s public market struggles, SoftBank’s $100 billion Vision Fund is no longer functioning as the IPO alternative.
“The round after us in the old days was an IPO,” said Miller, whose firm’s current investments include high-valued software companies HashiCorp, Rubrik and Tanium. “The round after us in the last few years was another private financing at a big mark-up from SoftBank or a sovereign wealth fund.”
Ethridge said PwC is forecasting 175 to 200 IPOs this year across all industries, a range he described as a “solid year.”
But that number is bolstered by a surge in SPACs, or special purpose acquisition companies. In a SPAC, a company gets purchased by a blank-check entity and taken public through the deal.
As of earlier this week, 51 SPACs had raised a record $21.5 billion, up 145% from the same period a year ago, according to Goldman Sachs.
Venture-backed tech companies haven’t been part of the SPAC mix, and are mostly sticking with the more traditional IPO. Some are looking at the SPAC route, according to Ernst & Young’s Kelley, while others are considering following the leads of Spotify and Slack in pursuing direct listings, enabling existing investors to sell shares without bringing in new capital.
Anchor investors and virtual roadshows
One common characteristic of recent IPOs in the volatile economic climate is a well-known anchor investor that can help bolster confidence in the issuer.
For example, Agora said in its prospectus that Dragoneer expressed interest in investing $50 million into its American depositary shares. Lemonade said Baillie Gifford wanted to buy $100 million of its stock, and BigCommerce said Tiger Global “indicated an interest in purchasing up to a maximum of 20%” of the offering.
As far as the pandemic goes, one big change is that all meetings between companies and prospective investors are happening over video. The roadshow, typically a two-week jaunt across the major money centers of the U.S., now occurs over four to six days, with the CEO and CFO talking to investor groups over video-conference, said Goldman’s Connolly.
Even when life and business return to some sense of normalcy, there’s no reason to expect the old roadshow to come back.
“A lot of what we’re learning will translate into when we emerge from the Covid era,” said Connolly. “You’ll have much more of a hybrid environment.”
Rackspace CEO Kevin Jones just wrapped up his six-day virtual roadshow from his home in Dallas. Along with CFO Dustin Semach, Jones said they used Zoom for hour-long meetings with investor groups and were able to lead some sessions for hundreds of investors at once.
“We didn’t have to travel all over world, and we also had more people attend,” Jones said. “Oftentimes with roadshows you don’t get every investor you want.”