Tech Firms Are Notably Scarce in IPO Market

Only 11% of U.S. IPOs so far in 2015 involved tech companies, according to new data from research firm Renaissance Capital. That is the lowest level since 2008, when the figure was 10% and the financial crisis was in full force. Meanwhile, shares in many of the companies that have gone public aren't performing well.

The data send a strong signal that the broader markets aren't eager to buy everything venture capitalists are selling, threatening the outlook for what has been one of the most robust segments of the U.S. investment landscape.

The stakes are high for early investors who rushed to buy stakes in still-private companies like luxury retailer Gilt Groupe Inc. and wearable-device maker Jawbone.

There are now at least 117 private companies valued by venture firms at $1 billion or more, nearly double the number from a year ago. Those investors could have trouble cashing in if the IPO market isn't able to support even higher valuations.

That could set up tensions between chief executives of private companies, many of whom have said they are happy to continue to stay private, and investors who eventually want to cash out.

"The VC premise that all of these fast-growing private companies are easily worth 10x to 20x forward sales is not holding up in the public markets and will make it tough to produce the returns their limited partners are expecting," said Paul Bard, director of research at Renaissance, in an email.

To be sure, some of the most valuable startups are intentionally holding off IPOs and growing at rates that could be eagerly welcomed by public investors. Ride-hailing service Uber Technologies Inc., for example, is expecting to boost revenue by 400% this year, and home rental service Airbnb Inc. is expecting revenue to triple, The Wall Street Journal has reported.

Prominent venture capitalist Marc Andreessen said in an exchange with the Journal on Twitter said that private-market investors are taking a longer view these days, giving startups more time for their businesses to mature. "In the modern era, public market time horizons have never been shorter, and private market time horizons have never been longer."

A range of factors has caused technology companies or their bankers to delay plans to go public. Many companies are simply staying private longer, thanks to lucrative fundraising rounds that provide enough capital to expand around the world without the headaches of investor relations and securities regulations that come with a public listing.

Uber, for instance, has raised more than $5 billion from investors including Microsoft Corp. , giving it a value of close to $51 billion.

Recent stock-market volatility caused by jitters about the health of China's economy and the Federal Reserve's plans for raising interest rates haven't helped the IPO pipeline. Companies are more likely to list their shares when markets are strong, to maximize proceeds. Sharp swings in share prices complicate IPO planning and cause potential investors to be more cautious.

Finally, a number of once-hot IPOs have performed badly recently. Shares of Chinese e-commerce giant Alibaba Group Holding Ltd. dropped below their IPO price in August and are down nearly 39% this year. Shares of Twitter Inc. are down 23% this year and, at $27.71, aren't much above their $26 IPO. Productivity-software company Box Inc. 's shares closed Thursday at $13.86, below their $14 IPO price.

Overall, technology companies that went public in 2015 have returned 3% from their IPO prices and minus-15% from the closing prices on their first day of trading, according to Dealogic, the point at which many investors were more likely to get into the stock.

Equally telling, the stock prices for at least 10 U.S. companies that have listed publicly since 2014 have fallen below the valuation at which they last raised capital privately. Shares of software firm Apigee Corp. , for example, closed Thursday at $7.47, down 66% from the $22.12 its venture-capital investors paid early last year.

Still, many private companies continue to raise money at tidy premiums relative to their public peers. WeWork Companies Inc., which subleases shared office space, was recently valued at $10 billion. Its publicly traded peer Regus PLC, which is known to control 12 times more space, is valued at less than $3 billion. Data-storage company Dropbox Inc. is valued at $10 billion compared with publicly traded rival Box, which has a market capitalization of under $2 billion.

While IPO shares may recover if the market rebounds, some recent acquisitions have come at declining valuations. Zulily Inc., an online retailer that went public in 2013, agreed to be acquired by Liberty Interactive Corp. in August for $18.75 a share, after going public at $22. Good Technology Corp. was pursuing an IPO, but agreed to be acquired by BlackBerry Ltd. for $425 million-less than half of what it was valued at in a private fundraising in 2013, according to Dow Jones VentureSource.

Those results are a potential warning signal to other billion-dollar startups that they may now face chillier receptions from public investors burned in prior deals.

The premium for private-company shares relative to what they might fetch publicly is confusing to analysts who believe rational investors should demand a discount for the long period before a sale or an IPO, during which they are unlikely to be able to sell their shares if something goes wrong.

"Private valuations...are supposed to factor in a discount for the added risk an investor is taking," Mr. Bard said.

"Many of these private valuations are ignoring the fundamental risks involved in achieving their projections. I suppose as long as the big winners produce outsize returns to cover the losers, the party can continue. But the stakes are getting higher."

Few companies valued at $1 billion or more by venture-capital investors are in the IPO pipeline, at least that have been disclosed.

With 15 tech IPOs through August, this year could witness the fewest public offerings since 2009.

The risk is that the poor reception in public markets could filter down to the still-sheltered private fundraising arena. Of the 10 most valuable privately held startups, according to Dow Jones VentureSource, eight have raised additional private funding in 2015-including from many mutual funds that would normally invest in IPOs-and none have filed to go public. That includes Spotify Inc., which was contemplating an IPO this year before raising over $500 million in private funds, the Journal has reported.

David Erickson, a former banker and venture-capital adviser who is now a senior fellow at The Wharton School at the University of Pennsylvania, said the dynamic may change in 2016 if private markets follow the lead of the public markets.

"It's hard to assess how recent public market volatility has affected the private market, but it likely will," he said.