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IPO Drought May Soon Be Over As Tech Giants Face Pressure

The complex market environment makes an IPO an unattractive option for tech companies, but soon, they may have no choice

28Oct

2016 has been another lean year for IPOs in the tech sector, as the drought continues. According to the FT, compared with 371 tech initial public offerings in 1999, there have been only 14 issued this year. Rising concerns over unstable economies, uncertainties caused by the EU referendum, and tension around the US elections have caused chaos in the stock market across all industries. There have also been some notable failures to put off anyone considering launching an IPO. Twitter, for instance, lost its sparkle after going public and is now trading below the share value.

External factors along with the absence of previous valuations can undeniably affect the decision to go public, however, recently, it seems like the problem may be deeper than that. Today's tech market has enormous potential, with the number disruptive startups having been mushrooming for the last couple of years. Yet, players like Airbnb and Uber, the most desirable for the stock market, have held back their IPO, making a much better living staying private.

Airbnb, for example, is in no rush, as the company has raised a total of $3.5 billion during funding rounds, with $1.5 billion once raised in one go. Not all young companies, though, can afford to show such confidence. An IPO can considerably boost a company's high profile (as well as ruin it), provide it with more liquid stock to fund acquisitions, and attract more investors. However, with recent disruptive startups, an IPO appears an unnecessary risk and an old-fashioned trend.

It turns out, though, that soon, an IPO for big players may become a matter of obligation rather than a choice. Tech investments are slowing down, and due to the fast-changing environment and industry saturation, some investors may want to cash in. Whilst those seeking ROI in the long-term can afford to wait, those chasing a short-term fix are becoming impatient.

With this in mind, here are three companies who may go public in 2017, despite having high valuations and cash positive status.

Dropbox

According to Bloomberg, Dropbox is currently in talks with advisers about potentially going public in 2017. There has been a number of questions raised over the real value of the company, which is worth $10 billion since its last private valuation in 2014. Dropbox and its storage solutions have been a massive success over the years, but the company is now reaching the point where because of limitations of the industry, it's becoming hard to offer new products and maintain high user growth.

The investors' growing skepticism towards the tech market caused by too much competition and disruption also doesn't make it easier. According to Fortune, Dropbox's private valuation has already started nosediving. Dropbox's shares have been marked down by some of the institutional investors, where Morgan Stanley's mutual fund, for example, reduced the number of shares by shocking 25%. If this tendency continues, Dropbox may have to consider going public, before it's too late.

Snapchat

Snapchat is forecasted to have over 217 million active users by the end of 2017, according to BI. The company has also succeeded in producing hardware in the form of smart glasses, which expands the company's influence now outside the digital market, making them even more attractive for investors. The company has already hired bank advisors from Morgan Stanley and Goldman Sachs to prepare the exit to the world of IPO.

Snapchat has been planning and preparing the company for this move for a while, so the debut is smooth and successful. The company has been actively expanding their team, hiring some of the leading professionals in the industry, including Imran Khan, the former Credit Suisse banker, who led Alibaba's successful IPO, and is now Snapchat's Chief Strategy Officer.

Spotify

Digital streaming is now the dominant form of accessing music, meaning Spotify not only faces increasing competition, but also more pressure from music producers regarding licensing. Despite having disrupted the way people listen to the music, Spotify has long been struggling to make profits and getting funds from investors. In March, Spotify raised $1 billion in convertible debt, offering strong guarantees that once the company launches an IPO, investors will receive a big discount on shares. In order to maintain its high valuation and keep its promise, Spotify is under pressure to go public sooner rather than later. 

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