Why Tech IPOs Didn't Rebound In 2016

After struggling throughout 2015, tech IPOs continued to drop off hard in 2016 as they reached lows not seen since the Great Recession. IPOs in general have stagnated due to reluctant investors. Only 49 companies went public through November compared to 95 last year, including just 20 tech companies for the entire year.

This drop off in IPOs can seem strange at first. Investors have talked a lot about waiting for the right moment, but 2016 was not a terrible year for the global economy. The problem for investors is that as Bloomberg notes, only 40 percent of 2016 tech IPOs “are trading above the closing share price on their first day of trading.”

What caused the tech IPO market to struggle in 2016 and will things get better in 2017? The tech IPO market should bounce back from its current lows. After all, we did see more tech companies go public at the end of the year compared to the beginning. We can also anticipate some major launches like Snap in 2017. But some of the key factors, especially political uncertainty, which have hurt the tech IPO market will remain and investors will still need to be careful.

One Crisis after Another

The first and most obvious cause of the weak tech IPO market has been the ensuing political chaos over the last year. From the Brexit to the surprise election of Donald Trump to the recent impeachment of Korean President Park Geun-hye, the past year has been one of constant political surprises. Surprises in general are not good for the market, and news like Trump’s election are not good surprises for a tech industry which has made their distaste for him very clear.

But while political turmoil is one of the major causes, a more fundamental explanation is that investors are more wary of investing in companies not turning a profit. The majority of tech companies which went public this year were not making a profit before they launched. Those companies attempted to attract investors by pointing to a rapid increase in something like revenue or subscriptions and argue that this increase would allow them to make a huge profit eventually.

That model could be called the Amazon approach, as the online retailer was well known for plowing its own profits to expand its business for years before it started delivering profits. But while Amazon (NASDAQ:AMZN) Amazon has succeeded, there are plenty of other companies like Twitter or GroupOn which failed to make a profit and have just lost money in the end. Investors are now more interested in seeing steady financial numbers, which makes tech companies promising big growth at some point less attractive.

Some things to look forward to

The Donald Trump presidency promises anything but calm, disciplined leadership and investors will continue to remain leery about just throwing money at any tech company promising big growth. But there are reasons to assume that the tech IPO market will get better beyond the fact that it cannot get much worse.

The first reason is that much bigger companies will join the market in 2017. Snap, best known for its social media app Snapchat, is one example as it appears to be preparing for a March IPO which could value the company at $25 billion. Airbnb and Uber are two other tech giants which could go public next year in a move to secure additional funding. This follows onto how far more tech companies filed at the end of the year than earlier when stock prices crashed, indicating that confidence is slowly being built up.

While most 2016 tech IPOS have seen their share price fall below their initial day value, some of the bigger ones like Twilio and Line, which offer a privacy guide for internet users, can report positive results. If bigger tech companies like Snap and Airbnb are successful in 2017, they could persuade both investors and other tech companies that now is the time to go public. And while tech companies may not like Trump, it is possible that he could create a more business-friendly environment for them by reducing taxes and regulations.

Slow but steady improvement

There is little doubt among analysts that both the number and value of IPOs will improve next year. This will improve investor confidence in the tech IPO market, which could in turn cause more cautious tech companies to join in, further bolster investor confidence, and create a market where tech IPOs can feel safe.

But while conditions will likely improve, tech IPOs will not reach the levels they did in 2013 and 2014. Investors should continue to wait and see if Trump will try to forge new relations with the tech industry and be wary of further global turmoil that could serve as an additional shock. However, 2017 should promise to be a year of a cautious yet optimistic turnaround for tech IPOs.