Newly listed tech groups in the US spent more than $12 billion in cash in 2022, with dozens of companies now facing tough questions about how to raise more funds after their stock prices plummet .
High-growth and loss-making groups dominated the market for initial public offerings in 2020 and 2021, with 150 technology groups raising at least $100 million each during the period, according to Dealogic data.
As proceeds from the trading frenzy begin to decline, many are faced with a choice between costly capital raises, extreme cost cutting, or to resume by private equity groups and larger rivals.
“[Those companies] benefited from very high valuations, but unless you really buck the trend, your stock is currently down. It can leave you a little stuck,” said Adam Fleisher, capital markets partner at law firm Cleary Gottlieb. “They have to figure out which is the least bad option until things change.”
Last year’s market downturn led to much talk in tech circles of a new focus on profitability and cash generation, but a Financial Times analysis of recent filings highlights how many companies still have a long way to go.
Of the 91 recently listed technology groups that have reported results so far this year, only 17 have reported a net profit. They spent $12 billion in cash last year – a total that would have been even worse had it not been for the stellar performance of Airbnb, which generated more than $2 billion. On average, cash-burning companies spent 37% of their IPO proceeds during the year.
About half of the 91s were in operating deficits, meaning they couldn’t simply cut back on investments if they needed to retain funds.
Meanwhile, their shares are down an average of 35% since listing, making additional stock sales costly and dilutive for existing investors.
Fleisher predicted that “some will sell stocks cheap if they are really desperate. . .[but]there has been no robust follow-up activity” so far.
Falling valuations are partly due to rising interest rates, which reduce the relative value investors place on future earnings. However, the declines also reflect concerns about the short-term outlook, which could add to the challenges of achieving profitability.
Ted Mortonson, technology strategist at Baird, said: “In 2023 [order] the pipelines were good, but the problem is getting new orders to replenish them. . . it’s kind of a universal problem. . .[and]it will become more difficult in the first half.
Some companies just hope they raised enough money during good times to ride out the storm. Automaker Rivian – which was not included in the analysis – spent $6.4 billion in 2022, but chief financial officer Claire McDonough said this week she was ‘confident’ it was left enough money to last until the end of 2025.
Others are not so lucky. At least 38 of the cohort have already announced job cuts since signing up, according to Layoffs.fyi, a tracking site, but it may take more: If last year’s burn rates hold up in 2023, almost a third of the groups analyzed by the FT would run out of cash by the end of the year.
The pressures have led to an increase in redemptions which experts expect to accelerate.
“I think you’re going to see a withdrawal from the public markets – a lot of these companies would like [traditionally] have been cooking longer behind the veil of being a private company, and maybe they need more time in that space,” said Andrea Schulz, partner at audit firm Grant Thornton, which specializes in technology companies. .
Baird’s Mortonson highlighted a recent madness affair by Thoma Bravo as a model that other private equity firms would follow. Thoma Bravo agreed last year to buy cybersecurity firm ForgeRock just 12 months after its IPO, as well as slightly more established groups Ping Identity and Sail Pointlisted in 2019 and 2017, respectively.
“[Private equity firms] know that a lot of these companies need to grow, so they’re getting the stuff to get these platforms,” Mortonson said. “[They] can buy below. . . and one day in a few years you will see combined entities going public again.
However, this route can also come with complications. The ForgeRock deal is under review by the U.S. Department of Justice, and Schulz said the antitrust pressure could discourage some of the biggest tech companies that would traditionally be tempted to buy out companies at a discount.
In other sectors, the tough market has encouraged borrowing through convertible bonds, debt that can be converted into equity if a company’s stock reaches a certain threshold. However, the terrible performance of a previous wave of convertibles issued by high-growth companies made investors wary of technology groups.
Companies such as Peloton, Beyond Meat and Airbnb issued bonds in early 2021 that paid no interest and would now require a massive rise in share prices to reach the point where they would convert to equity.
Michael Youngworth, convertibles strategist at Bank of America, said the market is currently dominated by large companies in “old economy” sectors. “The right [tech] name with less bubbly terms than we’ve seen in 2021 would be able to secure a deal. . .[but]conversion premiums will have to be much lower and coupons will have to be much higher. »
Some companies are turning to simpler, but expensive loans. Silicon Valley Bank chief executive Greg Becker told analysts earlier this year that the lender had seen a surge in borrowing from tech companies that would previously have sold shares.
But for some businesses, none of the options are likely to be appropriate. Schulz said the rush to list when valuations were high was causing public judgment that traditionally would have happened in private.
“What the public sees now is something that was [previously] digested in VC space. . .[companies]prove on the public stage whether or not they have a viable product or market for their product, and the results will be mixed. Some of them may cease to exist or be ‘acquired’, the practice of buying a business to recruit its staff.