ELIAN D. ALVAREZ

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Will 2018 Mark the End of Initial Public Offerings?

Jan
18

2017 turned out to be a great year for technology-based IPOs (Initial Public Offerings) that were backed by venture capital.

So many names in a corporate world went public last year, including SendGrid, StitchFix, BlueApron, Cloudera, and Yext. In fact, one of the most successful IPOs in the last few years was Snapchat. In 2018, there are some potential firms that are likely to go public, which is great because the Dow and S&P 500 are at the record high.

 

Beginning of the End for IPOs?

However, dark clouds have started to form on a distant horizon regarding IPOs. Spotify will probably go for direct listing and bypass the bank underwriting to go public. On the other hand, blockchain technology is booming and has attracted many retail investors, especially the ones who are skeptical about the IPOs and the corruption in this sector. Similarly, SoftBank Vision Fund is also trying to raise as much private capital as possible to provide protection to firms from the devastating effect of vulture funds.

There is an increasing awareness that current IPO sector is a hub of corruption, wherein, only those people are benefiting from the firms growth cycle who know the ‘right people’. The retail investors, however, are on the losing end as they are getting sufficient returns. This growing awareness is not going to subside, especially when there is a constant increase viability of other options.

 

Robust Technology – An Alternative to Conventional IPO

The fall of IPOs has been predicted so many times in the past, but it hasn’t happened yet. Ten or so years back when Google went for a Dutch-style IPO, so many people anticipated that it could a soon-to-be-ending road for banks who want to run a roadshow for investors. Similarly, a few years ago, when the pipeline of initial offerings dried up, the same hype was created.

Despite all the noise, the IPO has continued to provide good business. Although, firms will continue to go public by trading shares or securities, they are undergoing certain changes. For example, conventional ways of big banks to charge a huge fee is going to be replaced by more effective alternatives. So many bankers have already begun to lose their jobs after the introduction of technology. Goldman Sachs has already built an application that manages the IPO process. These steps are being taken to enhance the efficiency of operations.

There are only a few who have anticipated that IPOs will get a support of ethereum tokens and the Dutch East India company. However, no one can deny the fact that IPOs are growing weaker day by day, and they won’t survive in the long run if drastic measures are not taken.

 

Spotify’s Direct Listing

The company has managed to secure around 70 million paying subscribers, but at the same time, its chief content officer has resigned. In addition to that, the company is also dealing with some lawsuits filed by the music labels, which can be very damaging in the future.

Despite all the ups and downs, the news has come to light that Spotify is planning to go public via the direct listing. By undergoing direct listing, the company will not issue any new shares nor will it raise any capital through the process. For IPOs, this arrangement can be very devastating as financial institutions like Goldman Sachs will become deprived of underwriting fees, whereas, institutional investors will lose an opportunity to buy IPO shares at a huge discount like they did in the past.

Although, a direct listing of Spotify will be a little bumpy, it doesn’t mean that the process will end in disaster. The rise of digital trading based on algorithms will help Spotify stabilize the price after analyzing the market. The process will be executed as fast as it does for other initial offerings.

 

Increasing Trend of ICOs

Another disruptive disaster expected to happen is the rising trend of ICOs. Initial coin offerings or ICOs are being considered as a replacement for VCs. The rush of initial coin offerings among startup companies has placed a big question mark on the existence of IPOs. ICO model might not be applicable to every company, but being a competitive threat to IPO, they do not necessarily have to apply to every firm.

All in all, IPO is facing back to back attacks; a direct public offering will dramatically reduce the fees involved in conventional IPO, whereas, ICO will be an effective tool for potential financial growth. These disruptive tools are definitely going to rule out the need to go public so as to achieve financial strength, which would eventually impact the long-term sustenance of IPOs.

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