The tech IPO market surged in the first half of 2018

Domo CEO Josh James,
center, celebrates his company’s debut on the public markets in
June.

Domo/Nasdaq

• The number and value of tech public offerings jumped in
  the first half of this year, compared with last year.
• Investor demand and the eagerness of some startups to
  go public are driving the market for tech IPOs.
• The market should stay strong through the second half
  of this year and into 2019, according to tech bankers who spoke
  with Business Insider.

The market for public offerings in the tech sector popped in the
first half of this year and could get even better in the second
half and on into next year.

But you’ll likely have to wait have to wait until next year for
the biggest of the so-called unicorns — the private tech
companies valued at $1 billion or more, a group that includes
Uber, WeWork, and AirBnB — to hit the market.

That’s the word from some of the investment bankers who cater to
the tech industry and work with companies that are preparing to
go public. Investors are eager for new offerings from high-growth
firms, while at the same time many companies are itching to go
public after many years of being private, they say.

“The tech sector’s going to be busy,” said Brad Miller, global
head of equity syndicate at UBS. He continued: “We’re pretty
bullish on the sector going forward.”

2018 has already been a good year for tech IPOs

It’s already been a good market for tech IPOs. In the first half
of the year, 24 tech companies went public, according PwC. That’s
already more than the number that debuted in all of 2016, and is
11 more than the number that went public in the first half of
last year.

Jenny Cheng/BI Graphics

And the market valuation of the companies that have hit the
public markets in the first half of this year — $8.7 billion — is
up 77% from the same period last year, according to PwC. That
figure doesn’t include Spotify, which went public in a
non-traditional way. Had its $26.5 billion valuation at its
market debut been included, the total value of IPOs in the first
half would have been seven times greater than in the same period
last year. 

Jenny Cheng/BI Graphics

Among the companies that have debuted this year are
Domo, DocuSign, and Dropbox.

After the tech IPO market ended last year on a strong note,

industry insiders were expecting the momentum to carry into
this year.

“The first half of the year hasn’t disappointed,” said John
Chirico, co-head of capital markets origination for the Americas
at Citi.

Investors are hungry for growth

What’s helping drive the market is hunger on the part of
investors for the ability to invest in fast-growing firms. On
average, tech companies see a significant rise in their stock in
the 30 days following their IPOs, the tech bankers say. That kind
of immediate return can help boost the portfolios of
institutional investors.

So they’re demanding more such companies, because they’re not
getting that kind of quick-paced growth elsewhere. And investors
are more than willing, for now, to
trade revenue growth for profits.

Investors are being “compensated for taking risks in new
companies,” said Chirico. So, he continued, they’re “asking to
see more private companies.”

Part of what’s helping to drive the market — and increase
valuations for new tech firms — is that investors feel like they
have a better grasp on the risks faced by the companies that have
gone public lately, Chrico said. Earlier this decade, as
smartphones were coming to the fore, there was much more
uncertainty about many of the companies that were going public,
he said. It wasn’t clear how many people would eventually use
mobile devices or what kinds of things they would do with them.
It also wasn’t clear whether companies that had established
themselves on the web, like Facebook, would be able to make the
transition to mobile devices.

By contrast, many of the tech companies that are going public now
are going after established markets, Chirico said. The question
is no longer whether there’s a market for their products, but how
much of the market they can gobble up and how effectively the
established companies in the sector will respond.

“These business models are well-understood execution risks,” he
said. “Investors love that. They can assess that.”

Many tech companies are eager to go public

But the market is also being driven by the eagerness of tech
companies to go public, the bankers say. There’s plenty of
private capital still floating around, and at least some of the
prospective companies are generating cash, so many don’t
necessarily need to hit the public markets to grow or stay float.

However, the stock market has been on a long bull run, one that
will end sooner or later. There’s the sense among some of them
that they should go out while the public window is still open,
Miller said. After being private for years, there’s also the
feeling among those companies that it’s time to hit the public
markets, he said. Such a move could help those companies’
employees realize the value of their stock options and help the
companies themselves make acquisitions using their shares.

“It’s just the next phase for some of these companies,” Miller
said.

But don’t expect to see the most prominent of the still-private
companies hit the market just yet. Those companies still have
access to private capital and don’t have any urgency to go
public. But several of those companies are reportedly preparing
for it.

That could set up 2019 to be a big year for IPOs.

“It feels like there’s lot of activity that we’re likely to see
in the second half of this year, going into next year,” Chirico
said.