Airbnb Inc. and DoorDash Inc. earlier this week raised the terms for their initial public offerings as a stock market rally indicated investors might be willing to spend more to boost returns. Airbnb is now targeting a valuation of as much as $42 billion while DoorDash seeks a market value of around $36 billion.
“The IPO window is wide open,” said Matthew Smith, senior market strategist at Greenwich, Connecticut-based Renaissance Capital, a provider of IPO-focused exchange-traded funds.
Proceeds have reached $68.6 billion so far in 2020, trailing only 2014’s $85.3 billion, which received a $25 billion boost from Alibaba’s debut, as the largest year for IPOs since the 1999-2000 dotcom bubble. IPOs raked in more than $90 billion in 1999.
A flurry of IPO filings during the second half of 2020 has led to the most-active August, September and November since the height of the tech bubble.
Many of the companies that have gone public this year are pandemic plays in the technology and biotech sectors, propelling Renaissance’s IPO index to a 109% gain this year versus a 12% advance for the S&P 500. The index includes companies for two years past their IPO date.
“On one hand, the market overall is doing really well and people are at least excited about stocks that are kind of leaning to COVID,” said Bradley Tusk, CEO of the New York-based venture capital firm Tusk Holdings. “On the other hand, there's been a broader trend over the last couple of years where a lot of tech startups are just valued way too highly by the private markets.”
The poster child for the out-of-control valuations that are being assigned to startups is the shared workspace company WeWork, which in September 2019 withdrew its planned IPO amid investor concerns over its valuation.
WeWork, which was last valued at $47 billion in the private market, later received a $2.9 billion valuation from investor SoftBank, which was forced to bail out the company to salvage some of its investment.
Companies that remain private for too long lose the “pixie dust that the market looks for an IPO,” Tusk said, noting that WeWork and Uber were private for roughly a decade before launching their offerings.
Tusk pointed to the recent success of insurance provider Lemonade, of which he was an early investor, as evidence that more companies could look to IPO earlier on in their growth cycles. Lemonade, which was founded in 2015, has seen its market capitalization grow to $4.09 billion from its $1.6 billion valuation at its July IPO.
The IPO pipeline looks robust in 2021 with unicorns, or startups worth at least $1 billion, including grocery-delivery platform Instacart, free-trading app Robinhood Markets Inc. and payments company Stripe setting up for potential stock-market debuts. Other potential IPOs include Fortnite creator Epic Games and autonomous-vehicle company Waymo.
“There are so many unicorns out there that we wouldn't be surprised if we had some new records in 2021,” Smith said.