There were just three tech IPOs last year: what are the prospects for new issues now?
Jesse Chasse: We think this year will be a little better. We just had two flip public – Reddit and Astera Labs. But talking to founders and VCs, it still feels like everyone is focused on the window for 2025.
Those companies that do come public will do it for very idiosyncratic reasons: an investor that just needs the liquidity, an AI-themed company trying to take advantage of the hype around that theme, or companies that are mature and their employees need liquidity.
There are also some smaller companies that are better off coming out now, because next year, when the window does reopen, there’s going to be a wave of issuance from headline marquee names, so being out in front of that is a good thing.
Why have so many companies stayed private longer than expected?
Jesse Chasse: The sheer amount of capital raised in 2021 means companies have a lot of cash on the balance sheet. They also spent 2022 taking down burn and getting fit. There’s no forcing function to get them public.
But the IPO window is not closed: the demand is there. Investors want to buy IPOs – it’s the supply that’s the issue.
While the broader economy and consumer have been resilient, we’ve been in a B2B recession for 12 months. So the software companies that everyone’s most excited about are having a tough time forecasting their businesses.
‘The demand is there. Investors want to buy IPOs – it’s the supply that’s the issue’
Jesse Chasse, MD and Head of Technology, Equity Capital Markets, RBC
How is the valuation gap playing out?
Jesse Chasse: We’ve done a lot to close that gap. I think some companies have grown into their valuations to some extent. We’ve also normalized the idea that the public markets rerate every day, and there shouldn’t be a negative perception of a down round.
It shouldn’t be a surprise to anyone that the same rewriting we’ve seen in the public markets is going to happen for private companies. We just haven’t had enough liquidity to see that come to fruition yet.
What we’re seeing now is sponsors and PE evaluating different opportunities for liquidity. IPO is one option, but they might also want to consider a minority recap, taking some chips off the table and going public at a later date, or a straight sale.
In terms of different structures, the genie’s not going to go back in the bottle: there will be an opportunity to take companies public via SPAC or direct listing. But it’s going to be a very small part of the market.
What are the prospects for M&A in the sector?
We expect larger mega-cap mergers to continue, although the regulatory environment has made that tougher.
Also portfolio optimization – where you have two companies that in the past cycle could get public independently, now maybe you need to put them together to create enough scale to get public. We absolutely expect that to continue.
There’s plenty of cash, and the cost of capital environment is likely to get more attractive. In our view, there’s only upsides to M&A volumes.
‘In our view, there’s only upsides to M&A volumes’
Jesse Chasse, MD and Head of Technology, Equity Capital Markets, RBC
Do you expect a push for generative AI companies to go public before they can reach profitability?
This is potentially the biggest secular tailwind and revenue opportunity of our lifetimes. So you need investors that are willing to fund that opportunity. This is why VC exists.
If you think about what happened with Uber, there were a lot of complaints when it came public about the long-term rationality of the business, and a concern that all the value appreciation had been captured in the private markets. But it’s worked well.
VCs fund these ideas and take them to fruition. But when the public market steps in, the discipline that’s required, particularly from an earnings perspective, is what helps you get to that next level.
‘AI is potentially the biggest revenue opportunity of our lifetime – you need investors willing to fund that opportunity’
Jesse Chasse, MD and Head of Technology, Equity Capital Markets, RBC
What characteristics set up a company well for an IPO this year, and what would be your advice to founders and investors?
There is a price in the public markets for all sorts of assets, and I personally think for the tech IPO markets to truly heal, we need the return of the mid-cap IPO.
If you are a $200m to £300m revenue company, particularly in the enterprise software space, if you’re growing and have a line of sight to profitability, and most importantly a strong grasp of your financial model, so you can execute in the public markets and not miss in your first six quarters out of the gates – that’s what I think you need to get public, more than any perfect financial profile.
The market is healing. But from a macro perspective, there’s just as much uncertainty as there’s been in quite some time. But if you have a great grasp of your business, and you’re ready to go now, the markets open.
There’s much more investor scrutiny on TAM. A company that has built a differentiated technology, and purpose-built that technology to attack that TAM, that has economies of scale, durable moats, and real platform opportunities – that’s how I would sum up a best-in-class tech invest.
‘For the tech IPO markets to truly heal, we need the return of the mid-cap IPO’
Jesse Chasse, MD and Head of Technology, Equity Capital Markets, RBC
