By Doug Henton, Collaborative Economics
Initial public offerings (IPOs) generate returns for investors that fuel the growth of Silicon Valley’s next generation of startup companies. The third quarter update of the Silicon Valley Competitiveness and Innovation Project (svcip.com) shows that IPO valuations are down, in Silicon Valley, the nation and the world. This is a new development, with uncertain ramifications for the region’s next generation of startup businesses and economic growth.
Nationally, Renaissance Capital, a leading source for research on pre-IPO and IPO investment, reported a 43 percent annual decline in U.S. IPOs in Q3 2015 (down to 34 IPOs), in response to global market conditions and concerns about the U.S. Federal Reserve Bank raising interest rates. In addition, a significant number of IPOs were delayed or withdrawn. According to Renaissance Capital’s U.S. IPO Markets Q3 2015 Quarterly Review, average IPO returns were negative (-4 percent) for the first time since 2011, and more than half of new IPOs ended the quarter below their offer price. Global IPOs mirrored this trend; compared to Q3 2014, quarterly proceeds in Q3 2015 were down 63 percent (excluding Alibaba’s $21.8 billion IPO from Q3 2014 figures). In Q3 2015, six Silicon Valley-based companies went public, compared to 11 in the prior quarter.
Growth in IPO valuations throughout 2015 have also eased from 2014. According to Reuters, five of the 12 U.S.-based tech companies that went public this year (or 42 percent), priced their shares at a valuation below or nearly the same as their private market value, compared to 24 percent that went public in 2014. This trend suggests that companies are less optimistic about leveraging IPOs as a means of raising capital and driving significant increases in valuation.
This fear appears to be justified. According to Pitchbook, a private equity and venture capital research firm, in 2014 the median increase in value between private market valuations and companies’ post-IPO valuations was 61 percent (among the companies that saw their valuation grow through an IPO). In 2015 through Q3, companies that went public have only gained a median of 32 percent. The smaller valuation gains are affecting companies’ decisions about going public, with many delaying or withdrawing their public offering plans.
What are the implications for Silicon Valley? The returns generated by the IPOs help to fuel early stage investment in future startups. At the same time, the success of startups that go public has created significant job growth in our region. The question is whether the slump in Q3 2015 is a temporary development due to short term market changes, or is this a longer term trend that may affect the future growth of the Valley?
The Silicon Valley Competitiveness and Innovation Project was created by the Silicon Valley Leadership Group and Silicon Valley Community Foundation to track trends and identify potential early warning signs for the health of Silicon Valley’s innovation ecosystem and regional competitiveness. Continued tracking of IPO activity will help us keep a finger on the pulse of the innovation economy as we move into 2016.