The 2020 IPOs surge is fueled by bigger tech startups
Does history rhyme, or is it something new?
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2020 was a record-breaking year for IPOs within the last 20 years, and 2021 is set to be even higher. Consider that the IPO craze of 2020 only started in May and got into full gas in July - 2021 is marked to be a full year of IPOs.
First, I want to examine the amount of IPOs every year since 1998.
This chart tells an obvious story:
- In years of a financial downturn, like 2001-2003 (post dot com, 9\11) and 2008-2009 (post the financial crisis), we tend to stop IPOs.
- In years of financial exuberance, like 1998-2000 (dot com bubble), 2004-2007 (financial bubble), and 2020 (?) we have much more IPOs.
I could finish here, saying this is an indicator of a new bubble, maybe call it the fed-printing-money bubble, and be done with it.
But I have a hinge - this is not the story here. What I think is happening is much more subtle. The markets have so much money right now that it overruns the private VC money.
Big private companies owners cashing out
The markets are so exuberant that VCs jump on the opportunity to take home some profits.
For years, VCs had so much money that it made no sense for companies to go to the public market only to get burned as Uber did. Leading owners to keep companies private for much longer than it was normal before.
If my hypothesis is true, then a way to check it will be through the size of the IPOs. Big companies cashing out through the market, not out of necessity for funding, but out of the owners' willingness to cash out in an exuberant market, will have huge IPOs.
Let's take the previous data set but filter for IPOs selling shares of more than 200M$. For inflation's sake, I will filter 150M$ on the years 1998-2008. It doesn't affect the data as much as you'd think.
In 2020 we saw many big tech companies IPO. ZoomInfo, Lemonade, SnowFlake, JFrog, Unity, Palantir, Asana, DoorDash, AirBnB, Wish, and many more.
None of them "needed" to IPO. All of them could easily find more funds with VCs should they needed to. Some of them did, like Airbnb, at the start of the pandemic.
What we see here is a run to cash out. This run does not make sense unless owners (VCs and founders) thought they could get a better deal in the future.
They don't. The market is so obviously overpriced for tech companies that no one in his right mind would say a later IPO might perform better than now.
This is great for us individual, small investors. We get to participate in the market of many more great companies. Though, in my opinion, it might take years to have obvious opportunities in these segments.