Where Tech IPOs Went Wrong In 2015

28 Dec 2015

IPOs in 2015 weren’t great to begin with. In fact, the IPO market this past year had its worst year since 2009. Despite trendy names like Square and Shake Shack hitting the market, IPOs as a whole experienced a 39% drop in volume, and there’s one area in particular where things were really lagging - the tech industry. Tech startups were at their lowest level since 2008, and it poses big challenges for those looking to go public in 2016.

 

What Happened in 2015

Only 11% of the US IPOs in 2015 involved tech companies according to research firm Renaissance Capital. Why? Because simply put, the outlook wasn’t great for any of these companies. As Fortune so succinctly put it, the risk was too high and the reward too low.

Market volatility was high in 2015, spurred on by concerns about disruptions in the Chinese markets, and this increased volatility mean an increase in risk for investors. With an already concerning marketplace, investors did not want to further risk their capital by sinking it into a risky security. What’s more, the poor appeal of high risk is compacted by the uncertain reward. Young, growth-oriented companies churning out new technology have a lot of financial potential.

That potential is largely unproven, though, and while a calm market allows for investors to balance low and high risk investments in the hopes of gaining a better than market average reward, an uneasy market has most investors simply worrying about staying afloat. For these tech companies, then, it makes more sense to seek out additional private funding than to take their chances with the public marketplace. This has created what the market has started referring to as “unicorns” - privately held and generally unprofitable companies with large sum values such as Airbnb, Pinterest, and Uber, all of whom decided not to face the public this year.

 

The 2016 Outlook

The thing about these unicorns is that funding is plentiful now, but it’s not infinite. Investors eventually want to cash out, and that’s where next year’s outlook comes in. There’s concern that the private market will follow the public market’s lead, cooling off and anticipating an increased volatility that makes these kinds of investments less attractive. Renaissance Capital has three companies likely working on a 2016 IPO: Cloudera, Nutanix, and Dell’s SecureWorks business. While more are certain to come, compared to the 50+ tech IPOs in 2014 the prospect of just three for the coming year makes the tech sector look pretty bleak for public investors giving them all the more reason to stay away from the market in something of a self-destructive cycle.

If the private funding becomes more scarce, though, larger companies may have no other option than to seek public funding, even if it means initial losses. Facebook proved that such losses aren’t a death sentence, and if companies are left with no other option they might just have to take it. One thing is for sure, it’s going to make 2016 a year worth watching.