Here’s a statistic that might surprise you: IPOs beat the market last year.
Yes, in a year dominated by disappointing offerings from a slew of household names including Uber, Lyft, and Peloton (and marked by the shelving of WeWork’s notorious IPO), the Renaissance IPO Index rose 35% in 2019, beating the S&P 500, which was itself up an impressive 30%.
Michael Cembalest, chairman of market and investment strategy at JPMorgan Chase, wrote a 2020 Outlook note in which he pointed to companies such as Zoom and Medallia—what he considers “pure tech” plays—which rose over 80% and 40% since their respective IPOs through the end of 2019. These companies, according to the note, were able to scale with limited added costs compared with mixed-tech players that had more hardware to fund.
Bill.com, a business-payments software maker, held its IPO in December. The poor performance of the high-profile startups that had preceded its offering were of little concern, says board member David Chao—in part because Bill.com was in an entirely different business and had sought to grow gradually over the course of 14 years versus, say, hypergrowth in three.
And many of the analysts Fortune spoke to predicted 2020 would be a strong year for deal flow as well, especially as investors grow more particular about the types of companies that can thrive in the public markets.
“Getting these highly unprofitable companies off the road map creates spaces for fast-growing—though maybe not hypergrowth companies—to go on the road map,” says Adeo Ressi, CEO of pre-seed startup accelerator the Founder Institute, of the string of high-profile IPOs last year that have performed poorly in the public sphere.
“I think it is going to be less volatile than 2019, because in 2020, investment bankers are going to be more careful about pricing,” says Chao, who also invested in Bill.com through his fund DCM. “In 2019, there were a handful of mispriced IPOs—so in 2020, there will be fewer mispriced deals.”
“We expect to see the same level of IPOs to come through” in 2020, says Michael Spellacy, capital-markets industry senior managing director at Accenture, adding that he still sees a strong pipeline of unicorns ready to take the dip. “And due diligence is only going up.”
In 2019, companies raised an aggregate $46.3 billion in proceeds through 160 offerings, raising roughly the same amount as the year prior with 32 fewer deals, according to a year-end report from Renaissance Capital.
That’s not to say that all of this year’s offerings will be froth-free.
Casper, the unprofitable unicorn that makes mattresses, jump-started the year’s IPO pipeline with its filing in mid-January, outlining its goal of transforming the “sleep economy.”
Airbnb, which says it was profitable in 2017 and 2018 (though the verdict is still out for 2020), has also announced plans to go public this year. Work-management platform Asana and software development platform GitLab are also rumored to be eyeing offerings.
Meanwhile, after a year in which recession worries dominated, the economy appears to be on more stable footing for now, with low interest rates, low unemployment, and surging equity valuations.
“Advisers, banks, lawyers, and others have been telling companies to go in the first half of the year to effectively avoid the volatility of an election year,” says David Ethridge, U.S. IPO services leader at PwC. Many still remember what happened in the biotech arena during 2016, when pharmaceutical prices came under pressure amid election year posturing and tweeting by candidates.
More investor scrutiny
“Our belief is that the WeWork situation was not a ‘one-off’ occurrence,” Henry H. McVey, head of global macro and asset allocation at private equity giant KKR, wrote in a recent note. “Implicit in what we are saying is that we believe that some private company valuations have run too far, too fast to be supported through initial public offerings the way some of the venture capital and growth communities may have hoped.”
Indeed, many VCs are adjusting to a new focus on a company’s path to profitability.
“Around mid-2019 every venture capitalist advised companies—and I was guilty of this too—that it was all about growth … profitability can come later,” says Marten Abrahamsen, CFO of business-to-business payments fintech Fundbox. “Focus today on growth and market share. Then there was this first cohort of companies going public [in the latter part of 2019], and there was this shift to, ‘Maybe this is not as good of a business model at this scale.’”
Abrahamsen, who joined Fundbox roughly two weeks ago after his time as an investor at the Chernin Group, says that an IPO “is something we are working toward,” though he has no concrete timeline. And in his current position, rather than stressing scale and total addressable market size, he says, the company’s unit economics and ability to accurately forecast and predict its financials are a greater focus.
Anecdotally, says Abrahamsen, when looking through more recent pitch decks from other startups to investors, entrepreneurs also appear to be smartening up to the trend. For example, he’s seen the inclusion of pages touting a company’s breakeven point, whereas three or four years ago it was all about market opportunity.
After SoftBank-backed WeWork saw its valuation cut repeatedly, other companies in the Japanese giant’s pen—including Fair, Getaround, and Oyo— have faced layoffs. Scooter startup Lime laid off about 14% of its workforce and exited several markets, according to Axios. And while not a one-to-one comparison to startup land, the tech sector in general cut 64,166 jobs in 2019, up 351% from the year prior per a study by Challenger Gray & Christmas.
At the height of the dotcom bubble, says Dani Hughes, CEO of Divine Capital Markets, some 15 IPO deals would cross her desk a day as a company’s early investors and employees sought to sell in optimal market conditions. So far, she has yet to experience the same rush. “There was a greed factor I haven’t seen since then,” she says.
Now it remains to be seen if the peak of the IPO market in the 2020s will mirror that of the 2000s.
Things were “pushed down the pipes that shouldn’t have been pushed down the pipes,” says Spellacy of this past year. “Let’s see if the medicine of transparency and trust has been learned.”
More must-read stories from Fortune:
—Wells Fargo is the big bank that investors like least
—What we can learn from the man who tried to sell the Eiffel Tower—twice
—Why it’s time for a futures market in health care
—Retailers reuse and recycle their way to increased growth
—3 things investors can bank on in the uncertain 2020s
Subscribe to Fortune’s Bull Sheet for no-nonsense finance news and analysis daily.
