The IPO window for tech companies finally is cracking open.
After a lackluster year—as of early this week, there were only 18 tech-company new listings in the U.S., according to the Wall Street Journal, the lowest number since 2009—activity is stepping up as we move into fall. In September, six technology issuers went public on U.S. exchanges, including IT-software firm Apptio, which sells to CIOs; emergency-communication software firm Everbridge; and Nutanix*, which makes what it calls “hyper-converged” IT systems that integrate server and storage technologies inside datacenters. This morning, spend-management software company Coupa*, which helps centralize online procurement, invoicing and travel/expenses for companies, debuted as well.
Globally, tech IPOs raised $4.3 billion in September, according to Dealogic, representing 42% of total volume in the sector through the end of the third quarter.
Why all the recent activity? Two factors, to me, make macro-economic and market conditions positive for new issues right now. The first factor is the “VIX”, the ticker symbol for the Chicago Board Options Exchange Volatility Index, which reflects the market’s expectation of 30-day volatility. It’s a quick gauge for how choppy financial markets are at any given time. Low volatility is good for new stocks, and right now, the VIX is low—just under 14 (quoted in percentage points).
1-year VIX chart—10/05/2015-10/05/2016
The VIX has been falling, overall, since late June, shortly after the Brexit vote, when it hit nearly 26; it spiked slightly higher this past winter amid a broader drop in the S&P 500. (The VIX, technically, measures the implied volatility of S&P 500 Index options.) Obviously, plenty of events could drive the VIX back up (I’ll be watching that next presidential debate in two weeks!), but markets seem to be fairly steady right now.
The other big factor in my mind is the explosion in tech M&A recently, much of it involving cloud-software companies, and the financial implications that has for potential IPO buyers (meaning big mutual funds and other institutional investors). Below is our Battery analysis of all M&A deals worth more than $500 million involving cloud companies since 2009, according to data from PitchBook.
Just four of the recent, announced or completed cloud M&A deals—Oracle buying NetSuite, Microsoft scooping up LinkedIn, Salesforce acquiring Demandware, and Vista Equity acquiring Marketo*–are together worth about $40 billion. It’s a large amount of money. But one implication of this M&A activity that is not being discussed much is that it represents $40 billion in cash being held by large investors that probably needs to find a new home soon, assuming all these deals close.
Big mutual funds like T. Rowe Price, Fidelity and other investors have, in other words, lots of cash on hand to buy new stocks, which I think is another positive factor driving more IPOs. The recent month of new U.S. issues have, collectively, raised less than $1 billion, meaning there is still plenty of cash left to be put to work.
With apologies to the Lion King, you could call this the “Circle of Life” in the jungle that is cloud software: Cloud M&A creates cash flowing into the coffers of big investors, and it will need to flow out at some point. It’s a trend that should benefit all cloud IPOs for the rest of this year, but most notably into 2017.
By my count, there are nearly 30 cloud “unicorns”—companies valued at $1 billion or more—waiting in the wings to go public, and I think we’ll see some of them stage IPOs, other market conditions permitting, either just after the November U.S. presidential election or, more likely, next year. 2017 could be a busy year for new issues as the Cloud Circle of Life continues.
*Denotes a current or former Battery portfolio company. For a full list of all Battery investments and exits, please click here.