It’s been a tumultuous year for some of the tech sector’s once vaunted unicorns.
With underwhelming public market debuts (see: Lyft and Uber) and botched IPOs (a la WeWork), it’s hardly a stretch to wonder whether 2019 saw the bursting of a bubble—one characterized by tech firms that had parlayed robust investor appetite into grossly inflated, runaway private valuations.
But according to Goldman Sachs’ top tech investment banker, negative headlines have overshadowed what continues to be a strong environment for tech firms looking to tap the capital markets.
“A handful of private companies had difficult years, but the reports of dying unicorns are greatly exaggerated,” Nick Giovanni, head of the global technology, media, and telecom (TMT) group at Goldman Sachs, told Fortune.
Giovanni cited what’s been a fourth consecutive year of growth in U.S.-listed IPO volume by tech companies—a dynamic that he expects to continue going into 2020. “We’re in the middle of what we’ve been talking about for two years as a ‘megacycle,’” he noted. “I’d expect 2020 to be the fifth year in a row of growth in the tech IPO market.”
This past year was marked by tech darlings with private valuations in the tens of billions of dollars finding that life on the public markets—complete with heightened transparency and accountability to shareholders—can be a tricky proposition. But Giovanni says such growing pains are nothing new for relatively young companies, and pointed to an ever-larger backlog of private startups that will still look to go public.
“There were certainly some high-profile companies that went public and did not trade well, and some high-profile [private] write-downs, but that’s not a new phenomenon,” he says. “This is a period where the public markets are having to learn how to value and trade companies with private [valuation] benchmarks that are higher, and learn how to trade direct listings. We’re optimistic about these trends.”
New ways for companies to go public
With direct listings, Giovanni thinks the capital markets have found an “innovation” that he believes is here to stay. Goldman Sachs advised Slack on its direct listing this past summer, with the workplace software firm following Spotify (which went public via direct listing in 2018) in pursuing a heretofore unconventional route.
The direct listing model allows companies to list existing shares held by investors on a public exchange—rather than offering new shares for trading, as is done in an IPO. It allows them to bypass intermediaries such as underwriters, and also avoids the dilution of the company’s existing stock.
Of course, there are limitations to the direct listing model—such as an inability to raise money via offering new shares—which have dissuaded companies “that need to raise capital” in their public forays, Giovanni said. But that could be set to change, with November 26’s news that the New York Stock Exchange has filed paperwork with federal regulators seeking to allow companies to raise fresh capital via direct listings.
Whether it’s avoiding hefty underwriting fees or granting investors the ability to cash out shares, Giovanni added that “many more companies are considering direct listings” than before, and will pursue them as an avenue to going public in 2020.
The emergence of the direct listing model could also prove a jumping off point to “find[ing] new ways for companies to go public” in the future, he noted—with investment banks, regulators and exchanges continuing to discuss new potential paths for companies to access capital.
Not just consumer tech
While consumer-facing companies like Pinterest and Peloton grabbed much of the attention on the public markets, a resurgent enterprise software sector had a banner year in 2019—with the likes of CloudStrike, Cloudflare, Dynatrace, and Zoom all capitalizing via IPOs of their own.
“We have seen a tremendous growth in the number of enterprise software companies achieving larger scale,” Giovanni said, attributing that growth to “innovations in the way that enterprise software is developed and distributed.”
With businesses’ technological demands evolving and companies pouring more resources into the software they deploy, “we see that trend continuing,” he added.
Private funding still strong
The private financing markets, meanwhile, continue to roll on despite concerns that the investment environment has proven too frothy for its own good.
U.S. venture capital investors saw their bets rewarded with more than $200 billion in total exits for the first time in 2019, according to Goldman Sachs research. What’s more, there’s more dry powder out there than ever; U.S. and European VCs are holding a record $144 billion in uninvested capital, according to PitchBook data cited by Goldman.
Of course, the bank’s research also notes that VC fundraising slowed down notably this year, with fewer funds closed and less money raised in 2019 compared to recent record levels. And with SoftBank still wiping the egg off its face from the WeWork debacle, there’s heightened skepticism about whether private valuations are an accurate barometer of a company’s prospects.
Giovanni acknowledges that “to the extent that companies were focused on scaling at all costs and planning on the ability to raise money in the future, you’ve seen investors and companies pull back a small amount.”
But with many private investors continuing to generate strong returns thanks to robust exits, he believes the private markets “are still functioning very well.”
“There is a lot of capital to support great companies, to help them start and scale,” he says. “We’ve seen a significant amount of private value creation over the course of the last year.”