This piece originally appeared in FIN, James Ledbetter’s fintech newsletter.
Ten years ago, in 2011, there was exactly one company that could plausibly be called a fintech that went public all year: Zillow, the digital real estate marketplace, which began trading on July 20, 2011 and closed that day worth just below $1 billion. (Zillow’s public debut would, to many observers, be considered a stellar success, although years later CEO Spencer Rascoff called it a “facepalm moment” because the 200% stock pop minutes into trading implied that the company and its bankers had priced it too low.) Zillow currently has a market capitalization of $27 billion, so a decade later all those early investors have presumably pulled their faces out of their palms.
Last year, a record eight US fintech companies went public, in alphabetic order:
2021 has already surpassed that number, and one of the largest fintech IPOs ever will take place on June 9—Marqeta, which is expected to debut with a valuation of $12 billion, although presumably when Robinhood goes public soon it will dwarf even that eye-popping figure.
This IPO boom is not specific to fintech; more companies are going public on US markets than at any time in a generation. As Securities and Exchange Commission (SEC) head Gary Gensler noted in recent Congressional testimony:
From January 1 to May 19 of this year, nearly 400 companies filed traditional IPO S-1 forms. That is rapidly approaching the number of companies that filed for public offerings in all of 2016. Since the beginning of 2021, 118 traditional IPOs have been completed. In all of 2016, there were 138 traditional IPOs. At the current rate, I expect there will be more traditional IPOs than there were during the dot-com peak of 2000.
And that’s just the traditional method of going public: there is also the direct listing route (used this year by Coinbase, for example) and the special purpose acquisition route (SPAC), completed this week by SoFi. In the SPAC category, Gensler’s testimony noted that 300 SPAC transactions had taken place so far in 2021, compared to 13 for all of 2016.
Why this rush to go public, from fintech companies and in general? Of course, there are a ton more fintech companies now than there were ten, or even three, years ago. But the urgency to go public still stands out. After all, there was considerable consensus not so many years ago that being a public company in the United States was too much hassle. Starting around the Sarbanes-Oxley Act of 2002, CEOs argued that pre-IPO scrutiny from regulators and post-IPO hounding from security analysts make remaining private a far preferable option. In the financial space, 2010’s Dodd-Frank only reaffirmed this perception, and even consumer blockbusters like Airbnb and Uber stayed private much further into their corporate lifecycle than their dot-com counterparts did.
FIN interviewed a number of fintech and investment executives, and distilled four explanations for the IPO mania:
1) Exit pressure. Venture capitalists have a love-hate relationship with traditional IPOs. On the one hand, VCs seethe when they see the millions that get sucked out of big IPO deals by Wall Street’s fees and clients. That’s why many, notably Benchmark’s Bill Gurley, prefer direct listings. On the other hand, VC firms need the massive exit payday that IPOs often produce, in order to provide decent returns to their limited partners. Sure, VCs can also win big when a portfolio company is acquired, but for multibillion-dollar tech deals, there are not all that many acquiring bigwigs for whom strategy, timing, and valuation align with the needs of the company to be acquired. And even if the right partnership is found, mergers can take a long time to complete. Thus, given tremendous fintech investment in recent years—despite the COVID-19 pandemic, $105 billion was plowed into fintech in 2020 worldwide—it’s nearly inevitable that more companies will seek to go public. Closely related is…
2) Valuation pressure. In a classic description of bubble economics—specifically the banking behavior leading up to the 2008 subprime meltdown and subsequent Great Recession—former Citigroup CEO Chuck Prince said: “As long as the music is playing, you’ve got to get up and dance.” Right now, the fintech dance music is pumping loud enough to shake the trading floors. As FIN noted last week, valuations are rocketing; in the first quarter of 2021, the average pre-money valuation of a late-stage venture-backed company topped a billion dollars, more than double what it was at the end of 2020, according to PitchBook. This violent upward thrust will not go on indefinitely, and if you are a fintech CEO capable of going public this year, you could give up a fortune by waiting until next.
3) Talent pressure. While obviously the pandemic had a broad impact on workplaces worldwide, it alone will have no lasting effect on the fundamental employment dynamic of tech and fintech companies—namely, the fierce battle for the most-talented, and most-needed, employees. These tend to be engineers and programmers, and those who can productively manage them, but in the financial realm compliance and marketing are also critical areas. To attract the best talent—especially in a world where many technical employees can work remotely at least some of the time—companies need to compensate them competitively, and that’s much harder to do if you can’t offer them shares they reckon will be worth something.
4) Story pressure. Simply put, a successful IPO these days is at least as much a marketing tool as it is a way to raise money. Usually your CEO gets to ring the opening bell at Nasdaq, maybe Marketwatch has to run a story about your company it otherwise wouldn’t run. In a crowded market populated by some less-than-scintillating companies and personalities, an uplifting IPO can be a way to smash through the clutter. In the long run, even a facepalm moment might be worth it.
FIN has written a few times about fintech companies that want to get in on certain aspects of the banking business. An equally powerful trend is banks trying to get into the fintech business, and ditch the parts of banking that don’t work for them. It’s hard to think of a more stark encapsulation of what is going on than the last three weeks or so of stories about HSBC. Let’s take them slightly out of chronological order:
The lesson here seems to be: It’s still important for global banks to be global. But to the extent that they can maintain that global reach with digital products and services, they’d just as soon remove their physical presence from markets where they lose money.
This piece originally appeared in FIN, James Ledbetter’s fintech newsletter. Ledbetter is Chief Content Officer of Clarim Media, which owns Techonomy.
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