From Snap’s S-1, via Ben:
In a world where anyone can distribute products instantly and provide them for free, the best way to compete is by innovating to create the most engaging products. That’s because it’s difficult to use distribution or cost as a competitive advantage—new software is available to users immediately, and for free. We believe this means that our industry favors companies that innovate, because people will use their products.
Investors are betting 2017 will be better. Renaissance Capital pointed out that the average total return of I.P.O.s in 2016 reached 23 percent, a sharp reversal from the negative 2.1 percent return of 2015 offerings and surpassing the 21 percent return of two years ago.
So says a startup IPO wrap-up from Meanwhile, in the enterprise tech space, Brenon over at 451 reviews 2016:
The number of enterprise-focused companies that have set sail to Wall Street this year is once again mired in the single digits. That’s a disappointment given the abundant IPO-ready tech vendors and a bullish investor base that has pushed the broader US equity market to record levels in 2016.
By our count, just eight enterprise tech firms have made it public on the two major US exchanges so far this year, matching the total from 2015.
||Date of offering
||April 22, 2016
||June 23, 2016
||July 29, 2016
||September 23, 2016
||September 30, 2016
||October 10, 2016
||October 28, 2016
||October 28, 2016
But, the reason isn’t a lack of exits, there’s been much M&A in tech this past year, as Scott says:
Total M&A spending on infrastructure management jumped 57% to $15.2bn, with the volume of transactions rising to 152 from 146 as we near the end of 2016.
There are some big chunks in there – like the weirdly structured HP/MicroFocus deal for HP’s Software and cloud software groups which was $8.8bn, but left HP owning 51% of the combined company…so whatever you call that kind of deal.
It’s be even more helpful to see what the profits/returns on these deal were. Brenon has this on those eight tech IPOs:
The valuation of these acquisitions underscores the fact that December dealmaking has featured more ‘value’ than ‘growth’ strategies. All five of this month’s biggest deals have gone off at less than 4.4 times trailing sales, which is the average multiple for the 50 largest transactions announced overall in 2016, according to the M&A KnowledgeBase. On average, buyers in December have paid 3.3x trailing sales, a full turn lower than they did in the previous months of the year.
“In software, companies selling to IT have raised the most capital, then marketing, then HR, which is close consistent with software outcomes.”
Why Consumer Startups Dominate the Megaround Market
They did a study! The number of patents filed (an easy, cross-industry measure of innovation, though not perfect) went down the more scrutiny there was overly quarterly performance:
[The study] demonstrated that companies produce fewer, and less-significant patents the more financial analysts cover them.
I’m fascinating by this quandary at tech companies. Some like Google and Apple seem fine, Microsoft who has generally had stellar financials over the past decade nonetheless gets punished (for not being Apple and Google, basically), and then folks like Dell feel the need to go private to escape this problem. It’s a wicked problem.
Companies get worse at truly innovating the more financial analysts cover them