One sound bite still lingers from the days before the Great Dot-Com Crash of 2000, courtesy of an investment banker who insisted he wasn't concerned about the tsunami of funding sloshing around the IPO market. "It's Wall Street's job to throw money at companies," he said. And investors' job to sort the winners from the losers.
Throw money Wall Street did--to any entity ending in .com run by any group of idiots. How much? There were 486 IPOs in 1999, which collected $92.2 billion, and another 406 in 2000, for another $96.7 billion. Inflation-adjusted, that's $283 billion worth of equity raised. And then razed, in large measure: The Nasdaq, where much of that dot-com money lived, lost 78 percent of its value peak to trough.
Consider some IPOs from one week in May 1999: FashionMall.com, @Plan, CAIS Internet, David's Bridal, Interliant, Redback Networks, SBA Communications, Tenfold. And eToys.com, whose shares crested around $85 in late 1999; it was put down within two years, as was CAIS. But SBA, a cellphone infrastructure outfit, is worth about $23 billion today, and router tech purveyor Redback was sold for nearly $2 billion in 2006.
We won't see such numbers this year--about $70 billion is more likely--but Wall Street is in money-chucking mode again. "The window is open. The market tanked in 2018, and now people want to exit and they can," says Matthew Kennedy, senior IPO market strategist at Renaissance Capital, which runs several IPO-focused exchange-traded funds. Among those who have stepped up to the window or plan to: Lyft, Pinterest, Slack, Peloton, Uber, WeWork, Palantir, PagerDuty, Fastly, and Beyond Meat.
Prior to 2019, unicorn companies ran through an alphabet's worth of funding rounds to avoid going public. The number of IPOs dropped to 105 in 2016, and stories about the "death of the IPO" surfaced. Credit was cheap and available, and the JOBS Act allowed swarms of small investors to play jayvee VC. Meanwhile, private exchanges developed to allow insiders to cash out some of their shares, for a fee.
"There was a time when staying private meant you could experiment freely and develop lots of avenues for growth without being under the spotlight," says Jennifer G. Tejada, CEO of IT incident-response platform PagerDuty, whose wildly successful April IPO included a 59 percent pop in its first day of trading. In its startup years, PagerDuty used a strategy it called "land and expand": One IT guy at a company would buy the service and become its evangelist to colleagues. But now the company guns for sizable contracts requiring C-suite signoffs, so Tejada felt being public would brand PagerDuty as a long-term player. "The market has really started to understand the SaaS business model--the recurring revenue stream," she says. "You might argue that wasn't the case three to five years ago." She also thought PagerDuty would get more press coverage, promoting things like its 50 percent female leadership team, which is, unfortunately, rarely seen at tech companies.
Indeed, going public is a "branding event," one founder now contemplating an IPO told me. "If all you need is cash, I wouldn't think being public is the best option." This founder also says that the competition between Nasdaq and the NYSE for listings is so intense that it's generating incentive packages worth millions.
PagerDuty, like Uber or WeWork, didn't need funding. The IPO game this year is more about selling your narrative, says Luke Williams, clinical associate professor of marketing and entrepreneurship at New York University's Stern School of Business. "Startups grow through story, not structure," he says. "The shift that we're seeing is that the marketplace is again willing to bet on stories."
Investors clearly have an appetite for the tale of Beyond Meat, the plant-based burger and sausage company that had a delicious IPO. In founder Ethan Brown's thoughtful letter accompanying his S-1 filing, he cites shifts in human evolution that began 12,000 years ago and declares that the entire human race now has to evolve beyond its unsustainable reliance on meat-based protein. Judging from the early results, investors like that story.
And, while 20 years ago, the likes of Webvan and Pets.com merely transformed good money into bad, today's companies have proven operations. Zoom Video isn't a quantum computing play, and Peloton isn't betting on building miniature nuclear reactors. What we don't know is whether some companies can, as Kennedy says, "flip the switch" and turn their blitz-scaling machines into something that produces profits--which is, perhaps, one reason that the venture capital firms that have underwritten them for so long are headed for the exits.
Meanwhile, more than 30 high-risk biotechs will hit IPO this year too. Companies such as NextCure and Applied Therapeutics not only have no profits, they also have no revenue. What they have are researchers and scientists with a molecule or a biological pathway to a treatment. In NextCure's case, it's a new approach to immunomedicines to treat cancer and other immune-related diseases. Most biotechs are zero-sum plays. If their molecule or pathway fails, the company fails--and most fail. (In this regard, cancer kills biotech startups as cruelly as it does people.)
If companies now seem to be rushing to the IPO market, it may be they sense that the risks of waiting are rising fast. VCs are taking advantage of the best opportunity to transfer that risk--and burn rate--to public stockholders. Economists have been brooding about a slowdown or even recession in 2020; we may or may not be in a trade war, or a shooting war. As Uber proved in its first, disastrous week as a public company, the stock market is subject to an awful lot of noise, much of it courtesy of President Trump. As we head into an election year, such noise will only grow louder.