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The drought is over… a torrent of tech IPOs is expected in 2017

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Sandy Miller

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Sandy Miller is a general partner at IVP. He co-founded investment bank Thomas Weisel Partners and served as a senior partner at Montgomery Securities.

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We’ve just witnessed one of the most surprising tech IPO markets in decades. Wall Street set record upon record throughout 2016, and tech stocks led the way, hitting all-time highs. And yet, we saw a mere 13 IPOs for venture-backed U.S. technology companies during the entire year. I’ve been working in this industry for more than 40 years and I can’t remember anything like it.

Several factors contributed to this anomaly. Throughout much of the past two years, startups were more highly valued by private investors than on public exchanges. With mutual funds, hedge funds and sovereign wealth funds desperate to get into the game, there was so much late-stage capital chasing startups that many founders simply took the easy money and kicked the IPO can down the road. Market volatility ahead of the election prompted some startups to delay going public, as well.

But the reasons to wait are no longer relevant, and I believe we’re poised for a dramatic rebound. Pent-up demand and several other factors will make 2017 the strongest tech IPO market we’ve seen since the dot-com boom of the late 1990s. Don’t be surprised to see as many as 30 to 50 tech startups go public in the next 12 months. Let’s count the reasons.

Shifting sentiment

The election has passed, and while the outcome wasn’t quite what many in Silicon Valley expected, the stock market continues to rally. Risk is back in vogue and public markets now offer better prices than private investors. While only 13 U.S. venture-backed tech companies went public in 2016, most proved to be winners, with the entire class of 2016 trading up an average of 56 percent since going public.

This aftermarket performance has made technology the best performing IPO sector of 2016, a laudable result that is all-the-more-impressive given that the class of 2016 was headlined by niche players like Nutanix and Coupa Software rather than unicorns such as Uber or Airbnb. Wall Street is ready for more.

Great companies

The pullback in the private market this year has forced startups to get back to basics with a greater focus on sustainable growth, controlling operating expenses and generating positive cash flow. As a result, the IPO pipeline is chock full of quality tech startups that are perfectly poised to take advantage of the newly receptive public sentiment.

I’ll refrain from touting names, but I can think of dozens of quality startups with top teams and leading products that have reached $50-$100 million or more in revenues, are growing at more than 30 percent annually and are on a credible path toward profitability — if not already in the black. All in all, this is the biggest and best class of IPO-ready tech companies that we have ever seen.

A few sectors stand out, most notably software-as-a-service, cybersecurity and cloud infrastructure. It might feel as if Silicon Valley has been touting SaaS companies forever, but the numbers show that corporate America’s transition to cloud computing is still very much in the early stages. And as the allegations of Russia’s hacking in the recent election once again highlights, security continues to become a more important focus with each passing day.

Regulatory easing

It’s still too early to know exactly what President-elect Donald Trump intends to do, but he’s spoken repeatedly about easing regulatory burdens on small companies. This would be a welcome step to complement the 2012 JOBS Act, which allows — among other things — emerging growth companies to file confidential prospectuses with the SEC ahead of a planned IPO. The “testing the waters” provision enables startups to quietly gauge potential interest before actually committing to go public.

Trump could go further by amending the draconian rules that completely and utterly separate investment bankers from equity research analysts. Easing these rules, which are part of the Global Analysts Research Settlements of 2003 that addressed the abuses of the dot-com bubble era, would breathe new life into tech’s middle market and prime the pump for even more IPOs in the future.

That said, the stars on Wall Street are already aligning in a way we haven’t seen in far too long. Public markets are more receptive to tech stocks than at any time since the financial crisis and money managers have tremendous amounts of cash they must invest. IPOs remain a key driver of incremental gains and a means by which money managers can differentiate themselves from competitors.

Meanwhile, going public enables startups to provide liquidity for employees, as well as generate much needed publicity and credibility, which in turn bring customers and revenue. Companies of sufficient scale and growth would be foolish not to take advantage of improving market sentiment.

The key going forward will be to get pricing right. If the first companies out of the gate do so, and those deals perform well, the floodgates will open. Let’s remember that an IPO is not the end game; most of the great tech companies have made a far greater percentage of their returns after going public.

One successful IPO will beget another and I’m optimistic about Silicon Valley’s pipeline. Look for 2017 to be the best year for tech IPOs since the dot-com heyday almost two decades ago.

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