On the same day that Deliveroo’s IPO fizzled at the start of trading, Compass announced via a fresh S-1 filing that it will reduce the number of shares in its impending flotation and sell them at a lower price.
The move by Compass, a venture-backed residential brokerage, to lower its implied public-market valuation and sell fewer shares is a rebuke of the company’s earlier optimism regarding its valuation and ability to raise capital. The company’s IPO is still slated to generate as much as a half-billion dollars, so it can hardly be called a failure if it executes at its rejiggered price range, but the cuts matter.
Especially when we consider several other factors. The Deliveroo IPO, as discussed this morning, was impacted by more than mere economics. And there are questions regarding how interested seemingly more conservative countries’ stock exchanges will prove in growth-oriented, unprofitable companies.
But added to the mix are recent declines in the valuation of public software companies, effectively repricing the value of high-margin, recurring revenue. The reasons behind that particular change are several, but may include a rotation by public investors into other asset categories, or an air-letting from a sector that may have enjoyed some valuation inflation in the last year.
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In that vein, SMB cloud provider DigitalOcean’s own post-IPO declines from its offering price are a bit more understandable, as is a lack of a higher price interval from Kaltura, a video-focused software company, as it looks to list.
Taken together, the various market signs could point to a modest to moderate cooling in the tech IPO market. For a host of companies looking to debut via a SPAC, that could prove to be bad news.
How so? Because the interval between a target company agreeing to merge with a SPAC and when it actually begins to trade is a lengthy period. Latch, to pick an example, announced its deal in January of this year but doesn’t expect the transaction to close until the second quarter. That’s several months of lag from when a deal is priced and agreed upon and when it actually comes to be.
If the market shifts in the meantime, the resulting disconnect regarding prior pricing and new market conditions could stand out.
Companies like neoinsurance proivder Hippo, which priced its own SPAC-led debut during a warmer period for insurtech valuations, for example, could come to market under a different set of investor expectations and higher level of price discretion. Of course, Hippo is hardly alone in its potential quandary and we don’t mean to single them out for any reason other than it’s a useful example.
Tech shares have had their dips before, and in recent quarters any dip in the value of high-growth tech stocks has tended to be followed by even greater heights. But with the Bessemer Cloud Index trading around the price levels required for it to be in a technical bear market far from its 2021 heights, you start to wonder if things are changing.
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Olo, a New York-based provider of restaurant software, is a good counterexample: The company’s IPO was a success; but as any VC will tell you, good companies can go public whenever they wish, and the high-growth and profit-making software concern was just that. That limits the impact of its results on our larger analysis.
There’s lots to play for in the coming weeks: Consumer trading platform Robinhood has filed to go public, albeit privately and could list inside of Q2. Crypto-trading platform Coinbase’s direct listing should land inside the same time frame, if we’re properly reading the tea leaves. Kaltura and Compass have IPOs to finish, and the SPAC boom continues. International Robinhood competitor eToro is SPACing, recall, as is U.K.-based used car marketplace Cazoo. The two international firms imply that the fodder for more SPAC-led public debuts won’t be limited to mere domestic supply.
If the market is starting to treat high-growth tech (and tech-ish) companies with less deference and reverence, it could impact more than just IPO pricing and early trading. It could slow the great unicorn liquidity wave we’ve seen in recent quarters. For many investors looking forward to finally returning more than paper markups to their shareholders, that’s a worry.
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