The EconomistAugust 22nd 2020 Business 532 stockmarket investors are ready to accept
high valuations, says Lauren Cummings of
Morgan Stanley, an investment bank and a
leading underwriter of ipos. “There is insa-
tiable demand by public investors,” agrees
Brian Feinstein of Bessemer Venture Part-
ners, a venture-capital (vc) firm.
Startups are keen to slake it before it dis-
sipates. Many firms are therefore dusting
off listing plans that were put on hold in
the wake of the ride-hailing duds and the
WeWork snafu. Their case is bolstered be-
cause—and this is the second reason for
startups’ listing-lust—the pandemic has
been a boon for many tech firms.
The five big platforms—Alphabet’s Goo-
gle, Amazon, Apple, Facebook and Micro-
soft—have thrived as self-isolating con-
sumers spend more time and money
online, and firms splash out on cloud-com-
puting services to enable remote working.
On August 19th Apple briefly touched a
market capitalisation of $2trn, the first
American company to do so. Not-so-big
tech, too, has benefited, including many
companies that have recently gone public.
The pandemic has highlighted and sped
up a fundamental shift towards digital
businesses, says Sarah Cannon of Index
Ventures, a vc firm. The trend will last for
decades, she predicts. Markets concur. The
tech-heavy Renaissance ipoIndex, which
includes most listers of the past two years,
is up by more than 40% since January (see
chart 2). Zoom, whose videoconferencing
app has become ubiquitous amid lock-
downs, has seen its share price rise four-
fold since floating in April 2019; it is worth
$78bn. CrowdStrike, a cyber-security firm
which listed in June last year, has quadru-
pled in value since March.
One thing the latest boom has done is
highlight how unhappy startups and vc
firms have grown with the current process
of going public. It is cumbersome, with
reams of paperwork, and can take more
than a year. It is also pricey—and seen as
too cosy for Wall Street. Investment banks’fees alone eat up between 4% and 7% of a
typical ipo’s proceeds, not counting law-
yers and other advisers. Startups and vc
firms point to big first-day pops as evi-
dence that offerings are underpriced to
give banks’ big investors a quick return.
After all, those customers are regulars that
must be kept sweet, whereas most startups
only go public once.
Disaffection with the ipo process, com-
bined with a renewed desire to go public,
has led some firms to consider alterna-
tives. One is a “direct listing” of the sort Pa-
lantir is pursuing, and which Spotify, a
music-streaming service, and Slack, a cor-
porate-messaging firm, have used to good
effect. Asana, which sells web-based pro-
ject-management software, may be anoth-
er unicorn to take the direct route. Direct
listings use an electronic auction by the
stock exchange to get startups a fairer price
for their shares than investment bankers
might. But they do not allow firms to raise
new money. As a result, they are an option
only for cash-rich firms.
Another route that has gained promi-
nence is the special-purpose acquisition
company. These spacs, as they are known
for short, are shell firms that go public pro-
mising to buy one or more private busi-
nesses with the proceeds from the listing.
The private business then fills up the listed
shell through a reverse merger. spacs have
a dodgy history; many have underper-
formed the broader stockmarket. But the
latest lot promise to fix the flaws while pre-
serving the benefits, which include direct
negotiations over the purchase price that
can make deals faster and more predict-
able. From January to early August 60 spacs
went public, raising $22.5bn. In July Bill
Ackman, a hedge-fund boss, launched a
$5bn-7bn vehicle, the biggest so far.
It is unclear if Silicon Valley will em-
brace spacs wholeheartedly. The biggest
tech firm to have used one is Nikola, a se-
cretive zero-emission-lorry startup which
now boasts a market capitalisation of
about $16bn. Many entrepreneurs and their
backers would resist letting their firms be
sucked up into a shell. But spacs have a
place in tech world. On August 18th Kevin
Hartz, an early investor in Airbnb and Uber,
launched one. Ribbit Capital, a vc firm, is
reportedly planning another.
The ipo-industrial complex is not
averse to direct listings or spacs, even if
they are less lucrative than the old-school
ways. Bankers predict a diverse future of
increasingly tailor-made flotations that,
say, target specific investors and predeter-
mine how long staff must hold on to their
shares. As Greg Chamberlain of JPMorgan
Chase, a bank, sums up, “Not all technology
companies are the same. They have differ-
ent objectives.” So long as startups want to
cash in, as all ultimately do, they will need
Wall Street to shepherd them through. 7Public relations
Share prices, January 1st 2020=100Source:DatastreamfromRefinitiv1601401201008060
Jan Feb Mar Apr May JulJun AugNASDAQ CompositeS&P 500Renaissance IPO Index2I
t wasasurgicaloperationworthyof
the best “Fortnite” players. On August
13th Epic Games goaded Apple into boot-
ing its hit game from the App Store.
Within an hour of Apple’s decision, Epic
launched an antitrust lawsuit against the
tech giant. Epic’s slick parody of Apple’s
famous “1984” advert now cast its enemy
as the oppressive, grey Big Brother.
Epic’s provocation was to offer users
alternative payment methods for in-
game goodies. Those who bought 1,000
v-Bucks, the game’s internal currency,
via the App Store would cough up $9.99.
Buy directly from Epic, which would thus
avoid the 30% cut that Apple takes from
every in-app transaction, and you pay
$7.99. This dodge violates the App Store’s
rules, hence the expulsion. The same day
“Fortnite” was removed from Google’s
Play Store, which serves users of Android
phones, for the same reason.
At issue is the tight grip Apple exerts
over its devices. The firm tries to ensure
that the App Store is the only way for
iPhone users to obtain software. This,Applesays,keepsappskosherandse-
cure. Critics allege that it stifles competi-
tion and allows Apple to hold app-sellers
over a barrel. Unlike owners of Apple
phones, Android users can buy software,
including “Fortnite”, from various ven-
dors, limiting Google’s power; in 2018
Epic launched its own web-based store
for pc games, where it takes a 12% cut
from developers.
App developers and companies from
Airbnb to Match Group have had run-ins
with Apple similar to Epic’s. Complaints
from Spotify, a music-streaming service,
and Kobo, which makes an e-book read-
er, have led to an eu antitrust probe.
Shortly after Epic launched its lawsuit,
Spotify and Match voiced their support
for it. Epic claimed that a ban on “Fort-
nite” would threaten dozens of other
iPhone games that have licensed its code.
On August 17th Apple said the App
Store would welcome “Fortnite” back if
Epic shelved its payments ploy. Tim
Sweeney, Epic’s feisty boss, is unlikely to
give up that easily.Playing hard ball
Apple’s Epic dust-upThe world’s favourite computer game is taking on the world’s biggest technology firm