In mid-December we wrote about the performance of IPOs when uncertainty in the markets started to cause a buzz in the press. At that time, we wrote that “the bulk of the returns were made in private market investing vs the early years post IPO.” We still firmly believe this, but are updating some of the data to account for the ongoing volatility since mid-December. While IPOs have struggled over the last few months, the increase in median multiple (for companies in our data set) from one quarter prior to IPO through March 21, 2022, is still a healthy 1.56x, vs 2.3x on Dec. 10, 2021. In simple terms, this means that private market investors in those companies saw a 1.56x increase in their holdings, despite the recent public market’s downward trend. Since the IPO, the median return for those same companies we wrote about in December is now a negative 0.32x.
Top Tier Participated in 70% of the VC-backed Tech IPOs in the U.S. According to Crunchbase, there were 103 venture-backed US tech IPOs between Jan 1, 2019 and Dec 10, 2021. For consistency, we did not amend the list of companies which went public even though the number was small and would not affect the data materially. Top Tier participated in ~70% of these either directly or indirectly (through our LP positions in venture funds). This high level of participation provides us with meaningful insights into these companies, such as revenues and valuations from their pre-IPO days. Our analysis below considers these companies in the quarter before IPO, at IPO, one month after lock-up expiry and at March 21, 2022 (where applicable). We used one month post lock-up as a way to equalize traditional IPOs (6 month lock-up), direct listings (no lock-up) and SPACs (6 months post deSPACing).
Data set of 103 venture-backed US IPOs of US, European, and Israeli companies from 1/1/2019 to 12/10/2021 was sourced from Crunchbase. TTCP participation data, representing companies held by TTCP and/or portfolio funds invested into by TTCP, was sourced from The Mine database as of 12/10/2021. Public equity prices and revenue data was sourced from Yahoo Finance as of 12/10/2021 and on 3/21/2022
Despite the volatility in the public markets, venture-backed companies which experienced an IPO (or equivalent) have valuations 1.6x higher than they did the quarter prior to IPO. For many years, we have been telling investors that the bulk of the returns are made in the private markets vs in the early years post IPO. In fact, when considering the companies in TTCP’s IPO participation universe for this analysis, we find an average gross multiple on invested capital of 21x and median of 10x from investment to IPO. In the quarter prior to IPO, the median valuation for the pre-IPO companies considered in this study was a high $2.7 billioni. The median increase from that to the IPO valuation was 1.88x, implying valuations at IPO of about $5.0 billion. A question then, is how have these IPOs performed as public companies given all of this volatility of late?
As of our December post, the median change from IPO to the one-month post lock-up data point is a 23% gain. At the December 10, 2021 “check point”, the declines from IPO were only 1% for those companies old enough to be included in the metric.
Since updating the data for March 21, 2022, the median change from IPO to one-month post lock-up is a 15% gain. The change is mostly attributed to the 20 additonal companies which are now beyond that time horizon. However, at the new March 21, 2022 “check point”, the declines from IPO were 32% instead of 1%.
Even with the declines in the public markets, median company valuations are still at a high 1.6x above the valuation just one quarter prior to the IPO. That leaves a lot of downside before those investors lose money.
Data set consisting of 103 venture-backed US IPOs of US, European, and Israeli companies from 1/1/2019 to 12/10/2021 was sourced from Crunchbase. TTCP participation data, representing companies held by TTCP and/or portfolio funds invested into by TTCP, was sourced from The Mine database as of 12/10/2021. Public equity prices and revenue data was sourced from Yahoo Finance as of 3/21/2022. All calculations represent median values.
Pre-Pandemic IPOs are out-performing the rest. Interestingly, when looking at the performance of these IPOs over time, we notice a large difference in performance right around the start of the lock-downs in the US in mid-March 2020. Is this because pre-pandemic companies had a chance to bake in some performance before the markets turned? Perhaps it is because there were still relatively few IPOs compared with other years so the quality was higher? For reference, there were 23 IPOs in our data set in 2019 compared with 18 in 2020 and 62 in 2021. Only 23% of the IPOs occurred before the mid-March 2020 lock down.
Data set consisting of 103 venture-backed IPOs in U.S. of companies from U.S., Europe and Israel was sourced from Crunchbase. Revenue growth represents growth rate for the three-year period from January 1, 2019, to December 10, 2021, including year prior to IPO, year of IPO and year after IPO. Revenues and price per share data were sourced from Yahoo Finance.
The last three years were very active for IPOs within the venture community. Current valuations are high, but one could argue they are not overly extended, assuming revenues and revenue growth holds up. Outcomes can change quickly in public markets, but we take comfort knowing that while valuations are growing, so are these businesses. Our view is that the markets are rewarding innovation, perhaps even more so during this current period and within the relatively remote world in which we still live.
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Disclaimer: Performance data for fund families are not audited. Individual investor performance may vary from reported fund or fund family performance because of such factors as the timing of subscription to the fund, foreign exchange, differing fund expenses or fees and the ability to participate in certain investments.