By Emily Bary
Joel Saget/AFP via Getty Images
The public crash and burn of WeWork’s initial public offering and poor early performances from high-priced startups that actually managed to go public in 2019 likely won't stop other “decacorns” from testing the IPO market in 2020, but it may change how they do it.
Some of the biggest “decacorns” — startups valued at $10 billion or more on the private markets — made it to market in 2019 as expected, but there are still others that waited and watched an uneven performance by their peers. Highly visible consumer brands like Uber /zigman2/quotes/211348248/composite UBER +6.35% , Lyft /zigman2/quotes/208999293/composite LYFT -1.48% and Pinterest Inc. /zigman2/quotes/211319641/composite PINS +2.47% helped drive up the average deal size, though their stock performance has been lackluster at best.
Still, experts are calling for another strong IPO market in 2020, especially during the first half, to follow up a year with the highest average deal value since 2012. While the total deal count of 195 fell short of 2018’s total, the average size of deals in 2019 crossed the $300 million mark for the first time in seven years, according to data from PricewaterhouseCoopers.
There are expected to be differences, however. In short, companies are now likely to be mindful of the “WeWork effect,” said Phil Haslett, chief revenue officer at EquityZen, a marketplace for pre-IPO shares. “There’s more focus on profitability, less on outright revenue growth, and more focus on corporate governance.”
He said investors will be drawing greater distinctions between real tech companies and “tech-enabled” businesses such as Uber, Peloton Interactive Inc. /zigman2/quotes/208035743/composite PTON -0.99% , SmileDirectClub Inc. /zigman2/quotes/214109287/composite SDC +2.36% and WeWork, which was taken over by SoftBank this fall and forced to shelve its IPO plans.
For more: WeWork is a symptom of a disease that may not have a cure
The reckoning for “decacorn” names offers some lessons for companies thinking of going the IPO route. “There used to be a time 10 years ago when no one talked about profitability,” Previn Waas, Deloitte’s national IPO services leader, told MarketWatch. “Now the path to profitability has to be immediate or very near term, like six to 12 months into the future.”
While much of the focus in 2019 was on laggards like the ride-hailing companies and the WeWork blowup, there were plenty of successes as well, such as Beyond Meat Inc. /zigman2/quotes/211617595/composite BYND +6.18% . Some of the year’s stars were software names, including Crowdstrike Holdings Inc. /zigman2/quotes/212513426/composite CRWD +10.45% and Zoom Video Communications Inc. /zigman2/quotes/211319643/composite ZM +9.74% . Bill.com Holdings Inc.’s /zigman2/quotes/215406166/composite BILL +0.39% pop after a mid-December IPO indicates continued appetite for newly public software names, which could prompt more peers to join the party.
A tilt toward companies with recurring revenue streams makes software-focused unicorns seem like attractive candidates heading into the new year, with names like Stripe on many short lists. Deloitte’s Waas said consumer names may consider “right-sizing,” narrowing down on focus or geography, to prepare for the heightened scrutiny they might face if they tried going public.
The higher barometer for public life might force some companies to consider other options, said Will Andereck, a director with Union Square Advisors, including a sale.
“Oftentimes, people might use the listing of an IPO as a way to signal M&A interest,” he said. “Sometimes, companies get too big or the valuation gets too high that it doesn’t become interesting enough for corporate buyers to want to pursue,” meaning more businesses may choose to sell themselves earlier.
Read: China’s answer to WeWork files for IPO and it feels like deja vu all over again
While the direct-listing concept has gained more attention in recent years, with Slack Technologies Inc. /zigman2/quotes/212180539/composite WORK +7.71% and Spotify Technology SA /zigman2/quotes/207488629/composite SPOT +2.09% opting for that non-traditional route to the public markets, it’s still not an option for the vast majority of companies since it requires they don’t have a need to raise capital. Airbnb has reportedly expressed interest in a direct listing, and the company recently declared its “intention to become a publicly traded company during 2020.”
The New York Stock Exchange proposed creating a form of direct listing that would let companies still raise funds through the process, but the Securities and Exchange Commission turned it down in early December. Still, the attempt shows that there’s “unmet need” for the direct-listing concept, said EquityZen’s Haslett, who expects to see a few more direct listings in 2020.
There’s some debate on whether the upcoming presidential election will cool the IPO market in the latter part of the year. “Companies we’re talking to and are working with are looking at last year and saying either ‘get out before June’ or ‘shut down until after the election,’” Deloitte’s Waas said, with both summer vacations and political uncertainty factoring into those decisions.