Tech

Shira Ovide is a Bloomberg Gadfly columnist covering technology. She previously was a reporter for the Wall Street Journal.

The technology industry is in an IPO desert. A lone tech company, a Dell spinoff called SecureWorks, has gone public in the U.S. so far in 2016. Meanwhile, 162 "unicorns" -- startups valued at $1 billion or more -- are waiting, waiting, waiting to maybe go public and give investors a shot at getting their money back.

And no wonder we're in this dry spell. The performance of tech companies that went public since 2010 -- when the IPO market reopened after a financial crisis blockade -- should give investors pause. Young public tech firms have been at best a coin-toss bet, both on their own and as acquisition fodder.

No Profits Required
During a relatively fertile stretch for tech IPOs from 2010 to 2015, a minority of companies going public were profitable
Source: Jay Ritter, University of Florida

Of the nearly 200 tech companies that have held IPOs on U.S. stock exchanges since the start of 2010 and are still alive and independent, more than half are trading below the price at which the company first sold shares to the public, according to an analysis of Bloomberg data.

That means over the last six years and change, for every IPO winner like Facebook (triple its 2012 IPO price) or ServiceNow (nearly four times its IPO price from the same year), there is on average one loser such as GoPro (cut in half from its first stock sale two years ago) and Twitter (43 percent below its 2013 IPO).  

Yes, IPOs are always risky. Of U.S. tech companies that went public from 1980 to 2010 and were still active five years after their market debuts, about 60 percent were moored below their IPO share price, according to data from University of Florida finance professor Jay Ritter.

But this isn't the immature IPO market of the 1980s nor the dot-com flameout period post-1999. The recent dismal performance by tech IPOs came in the midst of a go-go period for equity markets. No one should blame bad market conditions. We can blame, in part, too many unworthy companies that went public.

In 2014, the recent peak year for tech IPOs, just 17 percent of the newly listed companies had been profitable in the prior 12 months, according to Ritter's research. That was the smallest share of profitable market debutantes since 2000.

Some of those unprofitable firms were like Zendesk, which continues to lose money but seems like a lasting company whose shares have nearly tripled since its 2014 IPO.

For other companies, it seemed simply saying a few magic words -- "cloud," for example -- could make them eligible for listing on the Nasdaq or the Big Board. Software firm -- oops, cloud software firm -- Castlight Health became something of a symbol for questionable IPO candidates when it went public in March 2014 with less than $13 million in revenue the previous year and a loss of $62 million.

Castlight Health soared on its first day of trading, to a peak market cap of $3.4 billion, according to Bloomberg data. It's been downhill ever since, and the company's market value now stands at $328 million.

Initial Public Disappointment
An exchange-traded fund of recently public companies has fallen 18 percent in the last year, and it has underperformed broader market indexes
Source: Bloomberg

Not only did the majority of tech IPOs since 2010 perform poorly on the stock market, nearly one in five of the original class has been sold or gone belly up. Of the more than 40 of those firms that were sold or have announced takeovers, more than half did so at prices below their initial public stock sale, an analysis of Bloomberg data shows.  

The swing from post-IPO glow to distressed sale doesn't take long, in some cases. James Cameron, the director of "Titanic" and "Avatar," took Digital Domain Media Group, his special-effects technology company, public in 2011, and it climbed to a peak market value of $400 million. Less than a year after the IPO, the company was struggling with a series of costly expansions, and it filed for bankruptcy protection and was sold for $15 million. Shareholders were wiped out.

This week, oPower agreed to sell itself to Oracle for $10.30 a share, about two years after the maker of software for the utility industry held its IPO. The company first sold stock at $19 in April 2014, and shares traded as high as $26 in the first few months after the IPO.

Now, plaintiffs' attorneys are circling oPower stockholders looking for those unhappy with a sale at 40 cents on the peak dollar share price.

There are a multitude of reasons for the dearth of tech IPOs lately. Richly valued startups are flush with money from private investors and are in no hurry to go public -- especially if those cruel public company investors will mash down their valuations.

But the awful track record of the last few years should only make investors extra wary of tech companies that go public. The garbage tech IPOs of the last few years have soured the market for everyone.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Shira Ovide in New York at sovide@bloomberg.net

To contact the editor responsible for this story:
Daniel Niemi at dniemi1@bloomberg.net