Pre-IPO evaluations of technology companies

Technology-based companies have always been valued differently by the public and private capital markets. 2016 showed strong pre-IPO valuations for technology companies reminiscent of the 2000 Dot Com bubble. There are fears that it could be too aggressive and cause the market to fall back into a turn of the century.

Existing pre-IPO companies are more diverse, geographically, than they were in 2000. It will be very interesting to see what areas unicorns will continue to be dominant after the IPO. India and China seem to have an advantage as their combined consumer base is three times that of the United States. It will also be important to note that their e-commerce marketplaces are growing faster. What has always favored American companies and continues to this day, is their ability to expand to a global audience.

Ratings of public tech companies have remained fairly consistent.

In 2000, the value of generic technology companies was 165% higher than the general market. Public technology companies averaged 80 times their earnings in 2000. By contrast, today’s public technology companies value, on average, 20 times their earnings. We can also note that they are valued, on average, at only 10% of the general market. Among public companies, there does not appear to be any significant risk of a bubble. Public companies seem to be more consistent compared to private companies

Ratings of private tech companies have been on the rise.

• Increased number of pre-IPO funding rounds

• The average volume of venture capital more than doubled between 2013 and 2015

• The market has seen average deal volumes unheard of

• 2015 saw the highest number of deals ever recorded in a year

• Unprecedented increases between funding rounds

• Globally committed funds increased from 110 billion in 2012 to 150 billion in 2015 (the highest level ever).

Tech companies also maintain their privacy on average 3 times. They are trying to avoid an initial public offering until the accounting profits are realized and the rules are gained. This means that in an IPO, companies are bigger, more mature, more stable, and more prepared than ever before.

Since 2000, the market seems to have taken a more conservative view of the valuation of generic technology companies. It’s also possible that new startups will be more robust and deserve high pre-IPO ratings. Any correction now, if needed at all, is likely to look more benign than the correction of the last technical bubble.