2014’s Tech IPO Pipeline Is Clogged. Here’s What Could Clear It

  • Share
  • Read Later
Ben Hider / Getty Images

We keep hearing how 2014 is positioned to be a terrific year for consumer-tech IPOs. So where are they? We’re seven weeks into the new year, and among the 35 companies that have listed on US exchanges (a 75% rise over 2013), there is only one tech name: Care.com. Most of the rest have been in energy and biotech.

Granted, seven weeks is too short to worry whether tech is shying away again from public markets, but it’s long enough to wonder what is going on. Another 49 companies have filed for IPOs this year (189% more than the year-ago period), yet among recent filings there are a handful of cloud startups like Aerohive Networks and Amber Road and two consumer-tech names: Coupons.com and, most notably and recently, King Digital.

Last week, GoPro filed confidentially for an IPO under new rules, which means the details of its operations remain shrouded from the public. There may well be others that have secretly filed and not leaked the news for small investors who may become shareholders. Either way, there remain other notable names thought to be planning IPOs, many of them well known to everyday consumers.

Among them: Airbnb, Uber, Square, Dropbox, Lending Club, Zoosk, Evernote, Box, Gilt, Jawbone, Pinterest, Vice and maybe even Snapchat. In this crowd, there may not be a giant IPO like Facebook or Twitter, but from an investment standpoint the sheer number of potential new offerings could compensate for the size.

In 2013, there was also a slow start to tech IPOs, but stocks like Twitter, Tableau, Zulily and ChannelAdvisor later debuted and delivered strong returns. Last year was the best for IPOs in tech and in general, so 2014 may not disappoint. And yet there are reasons why tech companies may choose to bide their time. For one, the tapering of generous monetary policies by the Federal Reserve could dry up available capital.

Longer term, there remains a lingering stigma among tech startups when it comes to IPOs. And startup executives have plenty of gripes: onerous underwriting fees from investment banks, increased public scrutiny of operations by rivals, the quarterly-earnings circus that favors for short-term performance over long-term strategy, and increased accounting and compliance costs under Sarbanes-Oxley.

What’s more, IPOs are facing more competition from M&A’s by big-tech giants. For evidence, consider Facebook’s $16 billion bid (plus $3 billion in equity leashes for current staff) for WhatsApp. The smartest tech giants have war chests stuffed with tens of billions of cash and highly valued stock to court startups loathe to go public.

Given all that, what popular, growing, profitable tech startup would go public? WhatsApp might be growing for many reasons and a good fit for Facebook, but how long would it take to be valued at $16 billion in the public market? What company would go public, not because they have to, but because they really, truly want to?

An answer lies in the tech companies that have priced or listed so far. Coupons.com has more than $90 million in net losses since 2010 and Care.com more than $60 million. Both project continued losses into the future. King Digital has $575 million in profit since 2010 and also a hot online-gaming franchise that may be cooling right as it goes public. None of these companies have the marks of golden IPOs, and none have been highly coveted M&A targets.

Yet there are signs that the public markets may offer warmer, calmer waters for tech startups to tread. By some counts, tech companies that went public in 2012 are up 170% from their offering prices, and nearly half of the class of ’12 have more than doubled from their IPO pricings (there are shadows of 1999 in those stats, but that’s another story).

Also, from a liquidity standpoint, the supply-and-demand balance may be as friendly as its been in decades. According to the World Federation of Exchanges, the number of stocks traded on US exchanges has fallen 44% since 1997 to 5,008. Granted, the remaining companies have grown since then. Yet over the past four years, thanks largely to buybacks, the available number of shares for trading has fallen by 10%.

So in 2014 so far, here’s what we have: A bunch of well-known, well-run companies signaling they will go public. A half-dozen reasons why they might not want to. And a market hungry for them to do exactly what they may not want to do. This is like a damp campfire with plenty of wood and kindling, just needing the right spark to set it burning.

What is that spark? It’s the potential IPO of 2014 not yet mentioned here. Ali Baba was the unlikely owner of a vast fortune in an old children’s bedtime story, and its corporate namesake is, in some ways, reschooling US investors on the folk tale.

The Chinese company’s revenue is bigger than that of eBay and Amazon combined, and its profits dictate the trajectory of Yahoo’s stock. Forget Twitter’s IPO. It’s so 2013. If Alibaba lists its shares in the US, as widely expected and hoped, the IPO’s reception will largely dictate the market’s mood for the rest of the year.

If the hotly anticipated crop of startups going public aren’t rushing into the market like biotechs, it may be because they don’t have to. Or it may be because they just don’t know whether to. It’s definitely not a sign of aversion. It’s more a sign of caution, maybe. Probably. Everyone is just waiting for that spark to set the market alight.

After all, there is still some stigma attached to tech IPOs in 2014. Among tech startups, there are three teirs of exit strategies. First come the privileged few that remain private as long as they possibly can. Then come the ones that sell out at high – hopefully insane – valuations to a bigger tech company. And then come the ones that go public.

But this year, there’s a catch: If the rush of technology IPOs delivers into public markets all the names so well known to consumers, then some of that old stigma might be erased. And who knows what that might mean for 2015?