Are the recent IPO successes a mark of change?

GoPro priced its shares at $24, the higher end of its price range, and by the end of the first day of trading, the valuation had increased by 30 per cent. Since this, the price has fluctuated but appears to have steadied around the $41-43 mark. Similarly, Tuniu has seen a growth of over 125 per cent in the three months following its IPO.

When Alibaba finally goes public this year, it could raise over $20bn making it the largest IPO ever in the US and potentially valuing it somewhere between $150-$200bn. By comparison, the listing valuations of GoPro and Tuniu ($3bn and $0.5bn respectively) seem small beer. Indeed, it would seem these businesses are outliers. 

The latest report on venture capital funding in the tech sector from CB Insights revealed that the second quarter of 2014 has seen more than $13bn of venture investments. This is the largest figure for any one quarter since the height of the dot.com boom in 2001. This is part of an upwards trend – nearly $24bn has been invested in VC deals during the first half of the year, 71 per cent better than the first six months of 2013. 

Digging into the numbers, though, it becomes clear that this is not due to a wider spread of investments, but increasingly large late-stage funding into mature businesses. For example, Uber raised $1.2bn in 2014, on top of the $361m it received from investors the year before. Airbnb took in a further $475m of investment, in addition to the $200m raised in 2012.

In a recent interview, Marc Andressen – co-founder of Netscape – argued that due to heavy regulation a company wishing to go public has to prepare itself for a much higher level of scrutiny than it would have done a decade ago. Any business looking to list on the London Stock Exchange will face similar regulation. Both the Listing, Disclosure and Transparency Rules of the Financial Conduct Authority impose obligations on companies following an IPO, particularly in respect of corporate governance and the disclosure and dissemination of information, which private companies do not need to comply with. 

Listed entities need to ensure that any inside information relating to the business is tightly controlled and disclosed to the market fairly. With a group of individual shareholders, this makes sense: a shareholder should not be given information which puts them at an advantage. However, the nature of the shareholder base in listed companies has changed dramatically over the last ten years. Now, listed companies may increasingly find their shares in the hands of investors involved in short-selling: essentially, betting against the rise of the company’s share price. Having to square away disclosure obligations when potentially dealing with unscrupulous shareholders can be very difficult, according to Andressen.

Dealing with such issues involves costs that only large mature businesses can handle. When Netscape listed in 1995, it did so on a valuation of $2bn. 17 years later, Facebook was worth more than 50 times that amount when it went public. Alibaba is just the latest in a long line of IPOs, where the company may have matured outside the public market. 

Andy Moseby is corporate partner of Kemp Little.

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