March 16, 2020 BARRON’S 33
TECH TRADER
Private markets are feeling the fallout of virus
panic, as well. One private-market trading
platform has seen selling activity spike 25%.
Another Coronavirus
Shutdown: IPOs
T
he coronavirus
cancellations and
suspensions
reached a fever
pitch this week: the
NBA, the NHL,
Major League Base-
ball, the Coachella music festival,
public schools, flights to Europe, po-
litical rallies, and my favorite spin
class. You can now add initial public
offerings to that list.
There have been just two IPOs in
March.GFL Environmental(ticker:
GFL), a waste-management company,
was priced on March 3 at $19, and has
since dropped below $16.Imara
(IMRA), a biotech company working
on treatments for rare hemoglobin
disorders, had the fortune of debuting
on the worst day forstockssince1987.
Imara priced at $16, the low end of its
expected range, and finished its first
day of trading on Thursday down 6%.
There have been 24 U.S. IPOs this
year, according to Renaissance Capi-
tal, up 85% from the same period a
year ago, but most of those issues
came before the bull market’s collapse.
Now everything has changed.
The IPO market is inherently risky
even in the best of times—look at
2019’s volatile debuts fromUber
Technologies(UBER),Lyft(LYFT),
Slack Technologies(WORK),Pelo-
ton Interactive(PTON), andPinter-
est(PINS). This was supposed to be a
big year for another bumper crop of
highly valued unicorns, including
Airbnb, DoorDash, and Robinhood.
None of those are sure things any-
more. The coronavirus pandemic has
all but closed the IPO window.
That’s trouble for tech bankers and
venture-capital firms, who spent years
grooming unicorns, turning them into
multibillion-dollar giants. And it’s
even worse for employees who were
looking forward to a profitable IPO
exit. Even the secondary markets,
where private company stock is sold
to institutions on behalf of start-ups
and their employees, are feeling the
market’s turbulence.
Phil Haslett, founder and chief rev-
enue officer at EquityZen, a New
York–based marketplace that enables
individual investors to buy shares of
venture-backed companies, says work-
ers at unicorn companies are lining up
to sell stock. Among those start-up
employees, whose net worth is tied up
in private company shares, there’s a
growing urge for liquidity, Haslett
notes. The problem is that even adven-
turous investors who usually crave
illiquid private stock aren’t jumping to
buy in the current environment.
Haslett says that in recent weeks
transactions on the platform have
been occurring at a roughly 25% dis-
count to a company’s last round of
funding, widening from a 10% to 15%
discount earlier this year.
Kelly Rodriques, CEO of San Fran-
cisco–based Forge, which has an insti-
tutionally focused platform for sec-
ondary trading in privately held stock,
says his firm has seen a 25% spike in
selling activity in recent weeks, creat-
ing a greater imbalance of buyers and
sellers than he’s seen at any time in
the past four years. Overall demand is
muted, Rodriques says, though there
has been a big spike in buyer interest
for the “stay at home” sector, including
delivery services, remote work tools,
online digital gaming, and news.
There are multiple unicorns involved
in those businesses, including Door-
Dash, Postmates, and Instacart, but
few of them are profitable.
Rodriques says institutional inves-
tors remain cautious on valuation,
although he’s not reporting the same
kind of widening discounts that Equi-
tyZen’s Haslett has seen. Rodriques
describes buyers as being in a “pause
and question” moment, making pur-
chases more slowly.
Haslett still sees potential for the
IPO market to pick back up in the
third quarter, ahead of the U.S. presi-
dential election inNovember, assum-
ing the coronavirus-driven chaos has
ebbed by then. But he thinks valua-
tions will be more conservative than
they were for the 2019 IPO class. The
most likely venture-backed companies
to get out the door, Haslett says, will be
those that have a CFO and board in
place, strong growth, and a good story
on profitability.
EquityZen this week issued a short
list of tech unicorns that could still
manage to go public this year, includ-
ing Actifio, an enterprise cloud-man-
agement software company; AppLo-
vin, a mobile marketing company;
Asana, which makes project-manage-
ment software; Desktop Metal, a 3-D
printing company; Druva, which spe-
cializes in cloud data protection soft-
ware; JFrog, which makes tools for
software development and distribu-
tion; Sprinklr, which offers cloud-
based customer-experience manage-
ment software; Vacasa, which
manages vacation properties; and Vel-
odyne Lidar, which sells sensors for
autonomous driving.
Kathleen Smith, co-founder of Re-
naissance Capital, an IPO research
firm which runs theRenaissance
IPOexchange-traded fund (IPO), says
two things need to happen for the IPO
window to reopen. First, market vola-
tility needs to come down. To track
that, she uses the VIX, the Cboe Vola-
tility Index, which spiked 40% on
Thursday, to over 72, the highest level
since the 2008 financial crisis.
Smith thinks the VIX needs to drop
below 30 to make conditions favorable
enough for IPOs. Second, she thinks
the market will need to see four to six
weeks of positive returns for recent
IPOs. Through Thursday, the Renais-
sance IPO ETF, which tracks new
issues for their first two years, was
down 23% this year, in line with the
S&P 500’s loss.
Once those criteria are met, Smith
says, we could start to see some new
offerings from quality, profitable com-
panies. One to watch, she says, is
Albertsons, the supermarket company
which recently filed for an IPO. Other
debuts she’s anticipating are from GE
Healthcare, building materials com-
pany Azek, and Warner Music.
But tech companies? They’ll likely
have to wait. While most pre-IPO tech
companies sport strong growth,
they’re rarely profitable. And inves-
tors already have enough risk in the
current public market. No one is clam-
oring for an unprofitable unicorn.B
By Eric J. Savitz
Therehavebeen24U.S.IPOsthisyear,
up85%fromayearago.Butmostofthose
issues came before the bull market’s
collapse. Now everything has changed.
Tim Mossholder