Tech entrepreneurs who for years were reluctant to wade into the public stock market have been jumping in lately with both feet.
As their shares outperform, newly public tech companies have been returning to the market to sell more stock at a nearly unprecedented clip. About 44% of the so-called follow-on stock offerings from U.S.-listed technology companies in the first 10 months of the year have come within 180 days of an initial public offering. That would be the second-highest yearly percentage since Dealogic began collecting data in 1995.
In a sign of the big pops tech companies have come to expect, they are selling just 17% of themselves on average in IPOs this year, the smallest proportion on record.
Technology shares that debuted on U.S. exchanges this year are up 22% on average through the end of October. That compares with a 1.4% rise in the S&P 500 and a 9.9% gain for tech shares in the index. New issues are outperforming even after tech shares were hit the hardest in the recent market turmoil. The Nasdaq Composite tumbled about 10% in October from a recent high and had its worst month in 10 years.
Overall, proceeds from share sales this year by already-public tech companies are the highest they have been since 2000. But the speed with which newly public companies have been able to return to the trough at higher prices shows how ravenous investors have been for new offerings from Silicon Valley and the outsize business-growth potential the IPOs bring.
“Even though there’s been a shift among investors toward more defensive parts of the economy, people still believe in the tech sector, particularly in software, that growth will be strong,” said Colin Stewart, managing director and vice chairman in global capital markets at Morgan Stanley .
Entrepreneurs spent years shunning the public markets in favor of a robust vein of cash available privately. But in 2018, for many companies the rewards of public ownership became too attractive to ignore.
Driven by a torrent of tech offerings from the likes of Dropbox Inc. and Spotify Technology SA, it has been the busiest year for U.S.-listed IPOs by number of deals and proceeds since 2014, with 212 companies raising $57 billion—including 50 technology companies that raised $19.7 billion.
Even as stocks have swooned, a number of companies have proceeded with IPO plans. Enterprise-software company Anaplan Inc. priced its IPO at the high end of expectations on Oct. 11 and the shares are up roughly 40% since then.
Next year could be even bigger for IPOs, as some of the largest startups that have been waiting in the wings, like ride-hailing service Uber Technologies Inc. and data-mining specialist Palantir Technologies Inc., gear up for their own debuts.
“Tech IPOs are still a scarce asset class,” said Chris Cormier, head of technology equity capital markets for the Americas at UBS Group AG. “Investors are looking for the next-gen name to own for the next three-to-five years.”
Should recent market declines continue, at some point it would likely take a bite out of the outperformance of tech-IPO shares and halt the parade of new issues and follow-ons. Some investors had already been warning that the red-hot IPO market, powered by money-losing tech startups, was due for a correction.
“We’re making disciplined investment decisions,” said Corey Shull, an analyst who looks at both private and public tech investments for fund manager T. Rowe Price Group Inc. Just because a company is selling more shares “doesn’t mean we have to buy more.”
The strong performance of newly public tech companies has made follow-on offerings and other deals like convertible-bond sales and mergers more attractive, said Byron Deeter, a partner at venture-capital firm Bessemer Venture Partners. “The going-public story has become more compelling all around,” he said, adding: “The cool factor of staying private forever is diminishing.”
Take DocuSign Inc. The electronic-signature-software company raised private capital at a valuation of $3 billion in 2015, and it was unclear if public markets would value it as high. But when DocuSign went public in April, the company sold shares at a better-than-expected price that valued it at $4.5 billion. By September, that had jumped to $8.7 billion, and key investors chose to sell another slug of stock for $443 million. The company, which sold just 16% of its shares in the IPO, now has a market capitalization of $6.7 billion.
Strong post-IPO performance has almost become an article of faith on Wall Street, spilling over into the M&A market, which is also surging—particularly for tech companies.
Some tech bankers said they have been advising clients who might be entertaining a possible sale alongside their IPO preparations to go public first because they are likely to get more in a takeover by waiting as little as a few months.
SendGrid Inc. went public in late 2017, raising $151 million in an IPO that valued the cloud-based communications-platform provider at $672 million. Less than six months later, SendGrid was valued at $1.05 billion and sold an additional $180 million in stock to public investors. Last month, SendGrid agreed to a roughly $2 billion all-stock sale to Twilio Inc., which went public in 2016.