Wall Street has discovered a new enthusiasm for tech IPOs, to judge by the third strong reception for a software company in less than a month. But few tech companies are waiting in the wings to take advantage of the most receptive IPO market for some time, say investors and other observers.
Okta (OKTA), which provides a secure process that its customers use to sign in to cloud services, raised $187m in an IPO on Friday. By the end of its first day of trading it was worth $2.1bn — up 38 per cent on the day, and 70 per cent ahead of the valuation it was initially targeting, based on the indicated price range for its shares ahead of the IPO.
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The heady reaction follows the strong stock market reception for application platform company Mulesoft (MULE), whose shares rose 34 per cent on their first day, and Alteryx (AYX), a data analytics company, which gained 11 per cent.
"Investors are starved for growth," said Lise Buyer, an IPO adviser at Class V Group. High valuations in the private market, which created a swath of "unicorns" valued at more than $1bn each, left little incentive for the tech start-ups to do the painstaking work of preparing for an IPO, she added. As a result, few companies are ready to catch the new wave of interest on Wall Street, despite a small flurry of new IPO filings.
"Last year was a tough market for new technology companies; this year seems to be better," said Frederic Kerrest, Okta chief operating officer, who says the company had been preparing to go public for 12-18 months. IPO activity in 2016 was at its lowest level since the financial crisis in 2009.
The splashy debut of consumer companies such as Snap (SNAP), which went public at the beginning of March, dominate the headlines for tech IPOs. But software and other companies selling to business customers — known as enterprise tech — make up the bread and butter of the tech IPO market.
The most notable company to file for an IPO recently, big data company Cloudera, is set to provide the biggest test for tech IPOs this year. The company, which was set up to popularise a technology developed at Yahoo to handle large amounts of data, was valued at $4.1bn in its last private round three years ago. At the time, that marked one of the highest valuations ever seen for an enterprise tech start-up.
"It will be hard to reach that valuation in an IPO," said Tim Porter, at Madrona Partners, a Seattle venture capital firm that invests in enterprise tech companies. The comparison with a similar company, Hortonworks (HDP), whose shares have struggled since a 2014 IPO, are likely to weigh on Cloudera, he added. Some of the company's mutual fund investors have also marked down their valuations of the company, reflecting the more cautious stance generally among private investors over the outlook for the unicorns.
The prospect of pricing shares in an IPO below the last private round was once seen as a hindrance for tech companies that were considering going public. But the number of companies that have now taken that step — including cloud storage company Box (BOX) and payments company Square (SQNXF) — has made this less of a problem, said Mr Porter.
Okta first indicated it would sell its shares in an IPO for as little as $13 a share, little more than the $12.02 a share it received in its last private round in 2015. An effort to sell the company failed to elicit a high enough offer, according to one person familiar with the process. It eventually priced its shares at $17, and they closed on Friday $23.51.