• An IPO Survey Hints at Trouble

    nowhere to runThis morning, the law firm Fenwick & West published its most recent report on the state of the IPO market. Its “2014 IPO Survey” doesn’t hold many surprises, but it does underscore an important point: Public market investors have grown more discriminating than they were in the late ’90s — and that’s bad news for the many late-stage companies that are being assigned bubble-era valuations.

    Let’s start with the number of IPOs in the U.S. across all industries last year. Sixty-eight life sciences companies went public (up from 41 in 2013). Meanwhile, 38 U.S.-based tech companies went public, which is almost exactly how many went public in 2013 when 37 IPO’d. (For some context, in 1999, 308 U.S. tech companies went public.)

    Life sciences offerings were on average smaller than technology deals, reports Fenwick, and they faced more pricing uncertainty. Of the life sciences deals in the first half and second half of 2014, approximately 44 percent and 52 percent priced below the bottom end of their expected range, compared with 15 percent and 27 percent of tech deals.

    Then again, they went public much faster, says Fenwick, which reports that of the tech companies that priced in the second half of last year, roughly two-thirds were on file for more than five months before pricing.

    Either way, the trend, post offering, was downward. According to Fenwick, those tech companies to go public in the first half of last year saw their shares fall by an average of 16.2 percent by the time their lock-up periods had expired. On average, shares of life sciences companies to go public in the first half of last year were down 1.3 percent by the end of their lock-up periods.

    Castlight Health, the cloud-based health-care tech company whose shares soared 149 percent on its opening day roughly a year ago, probably factors meaningfully into the above figures. Almost immediately after its IPO, its stock began to spiral. Today, those shares, originally priced at $16, are trading at $9.

    Still, the second half of the year looked much the same. In fact, first-day pricing appears to have grown even more rational, with tech stocks falling an average of 3 percent by the time their lock-up periods had ended, and life sciences shares dropping by 1.5 percent.

    That lack of drama is good for the public market investors, who are plainly approaching new offerings more carefully than they did during the go-go days of the late ’90s Internet boom and bust.

    It’s bad news for the many still-private tech companies have been raising money at exuberant valuations. (They can’t all be the next Uber.)

    You can download Fenwick’s full report here.

  • The Tech IPO Whisper Wars Heat Up

    chatterOn Friday, the Wall Street Journal reported that GoDaddy, which provides domain-name registration and Web hosting services to millions of customers, is “preparing for an initial public offering” and that in “coming weeks [GoDaddy] plans to interview banks” to underwrite its offering. The source was “people familiar with the matter.”

    For better or worse, such whisperings have now become the new normal, and we can expect to see much more of the same as a result of the JOBS Act and the changes it has brought to tech IPOs. (The JOBS Act permits companies to submit confidential draft registrations to the SEC and go public within 30 days of their acceptance.)

    Before the JOBS Act, filing an S-1 was much more public. Competitors knew a company was planning to go public, and any revisions by the SEC caused costly delays that could cause a company to miss its “window” to go public.

    GoDaddy was just one company that suffered through this process. In 2006, it tried to go public but later pulled its offering. Former CEO Bob Parsons, who was replaced as CEO in 2012, said at the time that he yanked the offering because he found the quiet period that came along with it “suffocating” as it prevented him for doing radio, TV, or his-then weekly Internet radio show. (The company was also losing money, according to its S-1.)

    Today, the JOBS Act gives companies much more flexibility in timing their offering, and leaking their supposed IPO plans has become a big part of the process.

    For now, the situation seems to be a win-win for everyone involved. Companies can test the public waters while simultaneously chumming for strategic acquirers, while reporters can feast on “scoops” that are hard to disprove.

    If there’s any downside, it’s that not going public after all can be, well, awkward, says Jay Ritter, a professor at the University of Florida who studies the I.P.O. market. “One of the reasons companies like confidential filings is that if they start the process, then pull back because the market isn’t as receptive to their business model as they thought, it can be embarrassing for a company, just as it might be embarrassing for someone who broadcasts that they’ve applied for a new job and gets turned down. People like to wait until the good outcome is about to occur before they announce things.”

    Conceivably, employee morale could take a hit, too, if staffers become convinced that an IPO is nearer than they thought based on press reports.

    But John Fitzgibbon, founder of the research firm IPO Scoop, says the advantages far outweigh any potential downside.

    “Before the Jobs Act,” says Fitzgibbon, “companies had to hang it out there and hope to God the market didn’t fall apart. But [the nearly two-year-old law] created market timing.”

    Now, says Fitzgibbon, “You prime the pump, get the guns lined up and, like Bunker Hill, you don’t fire until you see the whites of their eyes.”

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