Tough year for private tech funding

Atlassian co-founders and CEOs Mike Cannon-Brookes (centre) and Scott Farquhar (third from left) at the company's stock debut on Nasdaq on Dec 10. Public investors were willing to pay up for its shares after the company pitched its attractive track r
Atlassian co-founders and CEOs Mike Cannon-Brookes (centre) and Scott Farquhar (third from left) at the company's stock debut on Nasdaq on Dec 10. Public investors were willing to pay up for its shares after the company pitched its attractive track record.PHOTO: REUTERS

Firms may need to turn to IPOs and face greater scrutiny as other options cool

NEW YORK • Expect a resurrection of technology initial public offerings (IPOs) this year as private fund-raising options cool.

But when it comes to valuations, it may not be pretty.

After a slow year for tech IPOs, market-bound companies will need to show profitability - in addition to lofty promises of sales growth - before investors are willing to pile into share sales the way they have in the past.

"Investor sentiment has changed for those kinds of companies," said Mr Michael Goldberg, co-head of US equity capital markets at Royal Bank of Canada. "They embrace growth but they want to see a path to profitability and to cash flow."

The backlog of closely held technology and Internet companies has piled up, with more than 144 valued at more than US$1 billion (S$1.4 billion), research firm CB Insights said in a recent report. That amount turns private companies into unicorns, named after the mythical creatures that founders and investors are always chasing.

SHOW POTENTIAL

Companies with strong growth and fundamentals will be well received, regardless of market timing.

MR RYAN SWEENEY, a partner at Accel Partners, on the next wave of tech IPOs

For the most part, technology companies avoided the public markets last year, with the help of large private funding rounds that totalled US$51 billion, CB Insights said. That is more than six times the US$8.26 billion raised in US tech and Internet public offerings last year - the widest divergence since at least 2000, according to data from CB Insights and Bloomberg.

Equity market volatility, which picked up in August, further delayed some of the biggest expected offerings across industries.

Still, those companies waiting for better market conditions may find themselves fording uncertain waters, as bankers and investors say concerns about high private-market valuations may curb investments in non-public companies.

"No longer will private placements be the main domain where you can find very strong valuations with a plethora of investors hanging around the hoop," said Morgan Stanley's Mr Colin Stewart, who oversees tech financing.

Less availability of private funding may also prompt more companies to face the scrutiny of the public markets to get capital, he said.

Recent IPOs are illustrative of the promise - and pitfalls - of going public. Lacklustre public offering valuations late last year also serve as cautionary tales for private investors who hoped for lofty returns.

Public investors were willing to pay up for a piece of collaboration software maker Atlassian Corp after the company pitched its track record of conservative spending, annual revenue growth upwards of 40 per cent and 10 years of profits.

The shares sold in mid-December above their already-increased marketed IPO range, valuing the Sydney company at about US$4.4 billion - more than its US$3.3 billion private value. The deal set a high bar for successful tech IPOs, reminding founders eyeing public funding that a lucrative offering is still possible when the numbers are right.

Companies that have already gone public, like artisan goods marketplace Etsy and flash-sales site Groupon, face concerns from investors about revenue growth and profitability as shares languish below their IPO prices. These underscore how once-darling tech firms can fall out of favour if they do not eventually show profit growth.

Companies that sell tools for businesses have been better received by investors because revenue models and cash flow are typically more predictable than consumer tech businesses, the bankers said.

"Companies with strong growth and fundamentals will be well received, regardless of market timing," Mr Ryan Sweeney, a partner at Accel Partners, said of the next wave of tech IPOs.

"Rather than focusing on potential technology bubbles and open or closed windows, investors should be concerned with what they can control - investing in great entrepreneurs, sectors and business models."

BLOOMBERG

A version of this article appeared in the print edition of The Straits Times on January 02, 2016, with the headline 'Tough year for private tech funding'. Print Edition | Subscribe