Every homeowner knows how this sad tale ends. What happens if you keep shoving stuff into a narrow pipe? Eventually you get a blockage. You have to call a plumber to clean up the mess.
Here is the snapshot of the great technology IPO blockage of 2015: The number of tech companies going public is on the wane. The ones that have completed IPOs aren’t doing so hot. For example, late Wednesday, Square became an IPO sale casualty when it priced its offering at $9 a share, or nearly one-fifth below the most modest price estimate of its bankers. Yet private technology companies continue to raise record sums of money at higher valuations.
That has stuffed the potential IPO pipeline with richly valued startups, and few of them are coming out the other end as public stocks. Something's got to give.
There are 143 technology startups valued at $1 billion or more each, according to research firm CB Insights. This week’s IPOs of Square and online dating company Match are a rarity. On average, there were 41 technology IPOs each year from 2010 to 2014, according to data from Jay Ritter, a finance professor at the University of Florida. In the first half of 2015, there were 23.
Unless stock market trends shift significantly, it is going to take a long time for all those richly valued startups to wind their way to the public markets. Most likely, the blockage is going to have an unpleasant end.
Many of the highly valued tech startups, like Uber and Square, have needed a constant stream of fresh venture capital money to finance their cash-burning businesses. The money hasn't been hard to get, but there is a feeling in Silicon Valley that the easy money days are ending for all but the most promising companies.
There are early indicators that the booming growth rate of startup valuations also is easing a bit. Square's stock could perk up when shares start trading on Thursday, but the below-market IPO sale was a sign public investors aren't eager to snap up just any overly plump unicorn coming through the pipeline. Square is an ill harbinger for every startup. So was news that Fidelity cut its recorded valuations of some of its high-profile tech startup investments in a potential sign the mutual-fund giant believes a tech winter is coming.
This isn't a bubble bursting exactly, but more like air slowly escaping from the balloon. More and more startups, like Square, are going to have to swallow lower public-company valuations than they got used to as startups. Others are going to run out of money waiting for a potential IPO. What is tough to predict is how many, which ones and what the repercussions will be for the tech economy when they do.
The Square and Match offers also provide a teachable moment for something that stock investors already know, but may require a refresher: Buying stock in tech IPOs is unwise.
Sure, sometimes you’ll land on a Facebook or a Google or a Salesforce.com -- shares that seemed fully valued at the time of the IPO but turned out to deliver giant bags of cash for anyone who bought at the IPO price and held on. (Salesforce, for one, is trading for 28 times its IPO price in 2004, adjusted for a stock split.)
But on balance, and particularly recently, tech IPOs are a hot mess. The median return for the 70 major exchange tech IPOs since the beginning of 2014 has been 9.5 percent through Monday's market close, worse than the S&P 500 over the period, according to Bloomberg data . Nearly half of those young public tech companies are trading below the IPO price. Yes, shares of newly public companies tend to be volatile, but investors who buy into IPOs aren't usually happy to wait around for a decent return.
The combination of an expanding herd of unicorns and a lukewarm market for IPOs can't persist for long. Eventually the fix-it bill is going to come due.
This column does not necessarily reflect the opinion of Bloomberg LP and its owners.
Methodology: The IPO set included companies that listed shares on stock exchanges in New York and London and sold at least $50 million in IPO stock.
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Shira Ovide in New York at firstname.lastname@example.org
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