The U.S. IPO market hasn’t shut down, it has just become pickier. Israeli companies, or those that are associated with Israelis, were among those to first feel the impact of the shift by American investors, but they are not the only ones. Video creation and distribution company Kaltura Inc. was forced to postpone its IPO, in which it planned to raise $350 million at a $2 billion valuation to an unknown date, while real estate platform Compass, founded by Ori Allon, had to cut its issuance by half, from $900 million to nearly $450 million, though its shares spiked by 20% on the first day of trading, which put its valuation at $7.5 million. Meanwhile, online learning startup Coursera, which counts Israeli scientist Daphne Koller among its founders, was able to raise $520 million as planned and ended its first trading day up 36% to hit a $6 billion valuation.
After several volatile weeks for tech stocks, with the Nasdaq index falling by 4.3% from its mid-February high, investors are no longer flocking with the same levels of enthusiasm towards anything that has a whiff of tech. Deliveroo, which experienced the biggest IPO of the decade on the London Stock Exchange, ended up becoming the worst in the UK’s history with its stock falling by 26% on the first day of trading. Despite it taking place in London, Deliveroo’s IPO made people in Wall Street take notice too since one of its largest shareholders is Amazon, which purchased a 16% holding in the company two years ago.
When it comes to SPACs (special purpose acquisition companies), the image is even bleaker. SPACs have a direct effect on the IPO market because they are seen as an alternative to traditional IPOs that value the companies that make it to Wall Street more generously. If even this scorching path to the market is beginning to reveal cracks, it’s reasonable to expect the traditional IPO market to take a breather, relax for a moment and better assess what exactly gains entry into the stock market on the back of the tech hype.
Last week alone, four SPAC deals were postponed, and more and more of them are falling under the $10 per share threshold. This is causing questions to be asked in light of the fact that the $10 price tag is what investors were promised and the SPAC creators are required to return the money if they can’t find an appropriate company to merge with.
Israeli companies are also represented on the pessimistic side of the SPAC scale. On the day it was announced that Israeli insurtech company Hippo was merging with a SPAC at a $5 billion valuation, the response was tempered and the SPAC’s shares fell below the $10 mark. The announcement that IronSource would be merging with a SPAC created by Thoma Bravo at an $11 billion valuation failed to cause the company’s shares to spike as has become customary in recent months, a trend that was perhaps best exemplified when the price of the shares of the SPAC that Israeli company eToro merged with climbed by 55% on the announcement of the merger.
The negative sentiment towards SPACs is derived in part from the sheer amounts raised by these instruments and the inflated demand they created for tech companies and in part due to the growing interest that the U.S. SEC is taking in the jubilation. The regulator last week asked investment banks for information regarding their underwriting and risk management policies when it comes to SPACs, since unlike in regular IPOs, in SPACs, companies’ valuations are determined by their revenue projections going forward two or three years, even if they don’t currently have any earnings. In recent weeks, SPAC sponsors and the founders of the companies that merge with them have been urged to commit not to sell their shares for the first two or three years. In the meantime though, most companies are taking the opposite tack, with IronSource perhaps being the primary example of that, with only $900 million out of the $2.4 billion raised going to the company itself and the rest entering the bank accounts of its founders, early investors and employees.
The first quarter of 2021 was the busiest in terms of IPOs since the year 2000, with 102 offerings that raised companies a combined $40 billion. Over the same period, nearly 300 SPACs raised an accumulated $100 billion — more than in the whole of 2020. Having said that, Renaissance, an investment house that specializes in analyzing the IPO market, reveals that those gains were negligible in comparison to the S&P 500, showing that a combined basket of recently issues stocks fell by 3.4% since the start of the year compared to Wall Street’s primary index that climbed by 5.8%.
Now, everyone wants to play it safe. As a result, Kaltura — a mature company that first crossed the $100 million in revenues threshold in 2020 as a consequence of the pandemic and its accompanying lockdown — is not that attractive an offering. Even though it presented a 24% growth rate, its operational loss climbed in step. Wall Street investors may not be seeking profitability, but they do expect “compensation” in the form of higher growth or losses that indicate a downwards trend as proof that the business model can be maintained. The fact that its founders sought to sell relatively large bundles of shares at the time of issuance, didn’t help matters. It is possible that the SPAC route would have been preferable for Kaltura, enabling it to convince its sponsors of their investment’s viability and the relatively low sum it sought to raise.
Compass’s IPO didn’t go down easily either, though in its case the volumes are much higher compared to Kaltura: 56% year-on-year growth, shrinking losses, and a more familiar brand. The IPO’s success transformed Ori Allon’s roughly 5% holding into a $380 million package. These join two previous exits he took part in, the acquisition of a search algorithm he developed during his doctorate studies by Google and, two years later, the acquisition of his company Julpan by Twitter for $40 million.
The upcoming week looks to be short on new issuances, not because of the market conditions, but mostly because of the Easter Holiday. One company that is generating a lot of interest is WeWork, which is supposed to merge with a SPAC called BOWX at a $9 billion valuation — a fifth of the valuation it was aiming for in an IPO a year-and-a-half ago. Completing a successful IPO following a failed one is a rare occurrence on Wall Street and it usually demands a several-year break between attempts. So far, WeWork’s SPAC has reacted well to the planned merger, with its shares being traded at $13. This suggests that there is still an appetite for the risk involved in investing in shiny tech companies that lose money.