U.S.-listed tech companies are facing liquidity squeeze after burning billions in IPOs

Tech companies recently listed in the US will have more than $12 billion in 2022

High-growth, loss-making companies dominated the IPO market in 2020 and 2021, with 150 tech companies each raising at least $100 million during that period, according to Dealogic data.

However, as the proceeds of the dealmaking craze run dry, many are faced with a choice between expensive capital raising, extreme cost cutting, or acquisition by private equity groups and larger competitors.

“[Those companies] benefited from very high valuations, but unless you’re really bucking the trend, your stock is now deep in the red. That can kind of get you stuck,” said Adam Fleisher, a capital markets partner at law firm Cleary Gottlieb. “You have to figure out what the least bad option is until things change.”

Last year’s market downturn prompted widespread rumors in tech circles of a newfound focus on profitability and cash generation, but a Financial Times analysis of recent filings shows how many companies still have a long way to go.

Of the 91 recently listed tech companies that have reported results so far this year, only 17 reported net earnings. They spent a total of $12 billion in cash last year — a total that would have been even worse were it not for Airbnb’s outstanding performance, which brought in more than $2 billion. On average, cash-burning companies spent 37 percent of their IPO proceeds during the year.

About half of the 91 were making losses at an operational level — meaning they couldn’t just cut back on their investments when they needed to save money.

Meanwhile, its shares are down an average of 35 percent since listing, making further share sales expensive and dilutive for existing investors.

Fleisher predicted that “some stocks will sell cheap when they are very desperate . . .[but]there has been no robust follow-up activity to date.”

Falling valuations are due in part to rising interest rates, which reduce the relative value that investors place on future earnings. However, the declines also reflect concerns about the near-term outlook, which could add to challenges in achieving profitability.

Ted Mortonson, Tech Strategist at Baird, said: “Move into 2023 [order] Pipelines have been good, but the problem is getting new orders to refill them. . . it’s kind of a universal problem. . .[and]It will be more difficult in the first half.”

Some companies are simply hoping they raised enough cash while times were good to weather the storm. Automaker Rivian – which was not included in the analysis – reported a massive $6.4 billion in 2022.

Others are not so lucky. At least 38 of the cohort have already announced job cuts since they were listed, according to Layoffs.fyi, a tracking site, but more may be needed: If last year’s burn rates were maintained through 2023, nearly a third of the groups of the analyzed FT would be out of money by the end of the year.

The pressure has prompted a surge in takeover numbers that experts expect will accelerate.

“I think you’re going to see a pullout from public markets — a lot of these companies would do that [traditionally] have been baking behind the veil of a private company longer, and perhaps they need more time in that space,” said Andrea Schulz, a partner at Grant Thornton, an accounting firm that specializes in technology companies.

Baird’s Mortonson cited a recent deal tour by Thoma Bravo as a blueprint that other private equity firms would follow. Thoma Bravo last year agreed to buy cybersecurity company ForgeRock just under 12 months after it went public, along with more established groups Ping Identity and SailPoint, which went public in 2019 and 2017 respectively.

“[Private equity firms] know that many of these companies need to scale, so they’re acquiring the pieces to get those platforms,” ​​Mortonson said. “[They] can buy cheap. . . and one day in a few years you will see combined companies going public again.”

However, this route can also be associated with complications. The ForgeRock deal is under investigation by the US Department of Justice, and Schulz said antitrust pressures could deter some of the larger tech companies that have traditionally been tempted to buy companies at a discount.

In other industries, the troubled market has encouraged borrowing through convertible bonds, debt that can be converted into equity if a company’s shares reach a certain threshold. However, the terrible performance of a previous wave of convertible bonds issued by high-growth companies has made investors wary of tech giants.

Companies like Peloton, Beyond Meat, and Airbnb issued bonds in early 2021 that paid no interest and would now require a massive stock price rally to get to the point where they would convert to stocks.

Michael Youngworth, convertibles strategist at Bank of America, said the market is currently dominated by larger companies in “old economy” sectors. “The right [tech] Names with some less bubbly terms than those we’ve seen in 2021 would be able to strike a deal. . .[but]The conversion premiums would have to be much lower and the coupons would have to be much higher.”

Some companies are turning to simpler – but expensive – credit. Silicon Valley Bank chief executive Greg Becker told analysts earlier this year that the lender had seen a sharp increase in borrowing from tech companies that had previously sold shares.

But for some businesses, neither option may work. Schulz said the rush to list at high valuations has led to a public reckoning that traditionally would have been private.

“What the public sees now is something that was [previously] digested in the VC space. . .[companies]prove on the public stage whether or not they have a viable product or market for their product and there will be mixed results. Some of them may go out of existence or become “acqui-hired,” the practice of buying a company to hire its employees.