According to reports, data show that recently listed technology companies in the United States in 2022 burned more than 12 billion U.S. dollars (currently about RMB 82.92 billion. In the wake of plummeting stock prices, dozens of companies are now facing the dilemma of how to raise more money.
According to data analysis firm Dealogic, high-growth but still, loss-making companies dominate the IPO (initial public offering) market in the U.S. stock market in 2020 and 2021. During this period, 150 tech companies raise at least $100 million through IPOs (currently about RMB 691 million).
However, as the proceeds from the deal boom gradually run out, many companies are faced with the difficult choice of either raising money at a higher cost, cutting operating costs significantly, or being acquired by private equity firms or larger competitors.
These companies have benefited from very high valuations, but unless they really do buck the trend, their share prices must have fallen significantly by now,” said Adam Fleisher, a capital markets partner at Carlyle & Associates. They’ll have to find the best fit before things get better.”
Last year’s market downturn led the tech industry to start focusing on profitability and cash flow, yet an analysis of recent earnings reports shows that many tech companies still have a long way to go.
Of the 91 newly public tech companies that have reported earnings so far this year, only 17 have turned a net profit, and the cash burned last year totaled $12 billion. That number could have been even worse if Airbnb hadn’t done so well, with a cash flow of more than $2 billion. On average, these money-burners spent 37% of their IPO proceeds in one year in 2022.
In addition, about half of these 91 companies are operating at a loss. That means these companies can’t save money simply by cutting investments. At the same time, their share prices have fallen by an average of 35% since the IPO. This means that if the company sells further shares, existing investors will have to pay a high price, while the shares will be diluted.
Fleischer said that “some people may sell their shares at low prices if they feel very desperate”, however, so far “action on that front has not been very active”.
Part of the reason for the decline in the company’s valuation is the rise in dollar interest rates, which has reduced the relative value of future earnings for investors. At the same time, the stock’s decline reflects concerns about the near-term outlook, which could increase the challenge of achieving profitability.
Ted Mortonson, a technology sector analyst at U.S. brokerage Baird, said: “The order backlog is in good shape going into 2023, but the question is how to get new orders to replenish it. That’s a common problem, and it’s going to get more difficult in the first half of the year.”
Some companies believe the money raised in better times will be enough to help them weather the current storm. Carmaker Rivian burned through $6.4 billion in 2022, but Claire McDonough, the company’s chief financial officer, said last week that she was “confident” it had enough cash in reserve to last until the end of 2025.
Other companies have not been so lucky. According to Layoff. A platform that tracks company layoffs, at least 38 companies have announced layoffs since they went public, but further cuts may be needed: If last year’s burn rate continues through 2023, nearly a third of companies will run out of cash by the end of the year.
This pressure has led to an increase in M&A deals. Experts expect M&A activity to accelerate again this year.
I believe you will see a lot of companies exiting the public markets,” said Andrea Schulz, a partner at Tootsie & Associates who studies technology companies. Traditionally many companies would have operated in the unlisted state for longer, and perhaps they will now need to stay in the unlisted space for longer.”
Baird’s Mortenson said Thoma Bravo’s recent round of deals provides a blueprint for other private equity firms to follow. thoma Bravo struck a deal last year to acquire information security firm ForgeRock, which was just 12 months away from an IPO. thoma Bravo also acquired two other companies, Ping Identity and SailPoint, both of which go public in 2019 and 2017, respectively.
Private equity firms know that a lot of these companies have to scale, so they’re acquiring different pieces of the puzzle and building platforms like this,” Mortenson said. They can buy when prices are low. In a few years, you’ll see the merged entity go back to the market.”
However, this route may also come with complications that need to be addressed. The U.S. Department of Justice is currently investigating the ForgeRock deal. Schultz said antitrust pressure may cause some large technology companies that have previously been willing to buy other businesses at low prices to change their approach.
In other industries, tough market conditions are driving convertible debt financing. However, convertible bonds issued by high-growth technology companies have previously performed poorly and have also deterred investors. well-known technology companies such as Peloton, Beyond Meat and Airbnb issued zero-percent convertible bonds in early 2021, but now require a significant increase in share prices to meet the threshold for converting the bonds to stock.
The convertible market is currently dominated by larger companies in the “traditional economy,” said Michael Youngworth, a convertible analyst at Bank of America. “Compared to what we’ll see in 2021, the right technology companies with modest bubble terms can still strike a deal, but the conversion premium has to be much lower and the interest rate has to be much higher.”
Some companies are looking for a more direct but costly way to raise capital: a loan. Silicon Valley Bank CEO Greg Becker (Greg Becker) told analysts earlier this year that technology companies have seen a significant increase in loans to the bank, whereas in the past they preferred to finance themselves by selling stock.
For some other companies, those options may not be a good fit. Schultz said the rush to go public at higher valuations has led to issues that companies used to need to address in non-public situations being put into the public market spotlight. “The public will now see issues that previously only venture capital firms could see because these companies will have to go out on the public stage and prove whether there is a competitive or marketable product for them. The results will be mixed. Some of these companies will probably cease to exist, or the teams will be reeled in through M&A deals.”
