Tech IPOs: newly listed companies are growing more expensive

Valuations of newly listed US tech companies hit a two-decade high last year. Cue doom laden predictions of a market bubble to rival the dotcom bust of 2000. Yet both listings and revenue multiples have continued to climb this year.

Profitable tech start-ups remain thin on the ground. Valuation comparisons therefore rest on sales. According to University of Florida business professor Jay Ritter, the average tech company joining public markets last year received a higher multiple of trailing revenue than in the past decade. Based on offer prices, the median price-to-sales ratio was 13.4 times, about 70 per cent higher than in 2019.

Some of this year’s largest tech initial public offerings go higher still. Take Affirm, one of the first big venture capital-backed companies to list in 2021. Affirm, based in San Francisco, has a “buy now, pay later” service that rivals Sweden’s Klarna. The company’s IPO valuation of $11.9bn was 23 times top line for the last fiscal year.

This past year has been record-breaking for US venture capital-backed IPOs, both by deal count and value. Across fintech, social media, artificial intelligence and marketing software, valuations soared. Robotics company UiPath listed at a down round that was still about 48 times trailing revenue. Trading app Robinhood, famous for its no-commission trades and meme stocks, listed at a $32bn valuation, about 32 times trailing year sales.

Yet nothing tops the spectacular example of electric-vehicle maker Rivian, which had the year’s biggest IPO despite lacking meaningful revenue from vehicles or other products and services. Instead, the California company had investor faith in the future of electric pick-ups to thank for its listing valuation of $66.5bn.

The pipeline for new listings is strong. This year, more than 600 start-ups joined the swelling ranks of unicorns valued at more than $1bn. Still, splashy debuts followed by stock price dips suggest investors are growing more selective. VC-backed IPO stocks as a whole have underperformed the S&P 500 this year, according to PitchBook data, which excludes first-day pops. Not every company rushing for the exit deserves a warm reception.