2019 was a mixed bag for the public aspirations of founder-led technology businesses both in the global markets and back home in Australia.
During the year, several high profile, founder-led technology companies (valued over $1 billion) listed on the US-exchanges. Some of these have performed well while others have struggled to meet investor expectations. There was also the highly anticipated WeWork public offering which has been delayed indefinitely.
Both WeWork and Latitude Financial Services (which withdrew its IPO from the ASX earlier this year) were heavily backed by venture capital and private equity and were also expected to raise large amounts in their respective markets.
There are a number of reasons why these companies failed to resonate with the wider investor base. What they both had in common was that they appeared overly bullish in the valuation expectations and presented a degree of uncertainty in their respective pathway to growth or profitability.
Globally, a number of heavily backed 2019 IPO debutants struggled to achieve pre-IPO expectations once public. Recent examples include Uber, Lyft and Prospa. This may indicate some quarters of the public market investor base have not been solely influenced by market perception. Instead, they are focusing on a business’s ability to demonstrate sustainable growth over a long term period. Investors want to see a clear pathway to profit and positive cashflows along with continued focus on internal corporate governance structures.
This may give cause for future founder-led high growth companies to consider staying private for longer. Postponing a public offering gives them the opportunity to tap into the private capital investor
base and source the funding required to grow and develop further into a profitable business.
According to global research, the accumulated private capital dry powder, waiting to be deployed by the custodians of capital, now exceeds *$US2 trillion. In 2019, new cash flowing into US private equity funds exceeded $US300 million. Locally, there is a growing supply and availability of venture capital willing to support earlier stage and high growth businesses. This is in addition to an increasing pool of alternative funders which are looking to deploy capital into growing private businesses.
Postponing an IPO may give a business greater control and flexibility to further enhance and develop their business model. It would enable them to generate good corporate governance frameworks
along with the opportunity to turn their cashflows to positive while managing the expectations of a smaller group of shareholders.
Ultimately, a public market exit remains a fantastic liquidity event for private company shareholders. The ASX has a long history of its investors showing support for growth businesses.
In 2019, the S&P/ASX 200 saw its best year since 2009, gaining 18%. In particular, the S&P/ASX Emerging Companies index gained 29% over the year. This indicated that, once listed (and at the right time), great businesses are likely to obtain continued investor support and potentially provide continued returns for the shareholders.
This article was originally published in the 2020 IPO Watch Report.