Lonne Jaffe, a managing director with Insight Partners.
Courtesy Photograph
Software companies delivered some of the biggest initial public offerings this year. That likely won’t change going into 2021, according to Lonne Jaffe, a managing director with Insight Partners.
Fifty U.S. software companies have gone public this year, collecting $26.2 billion, according to Dealgoic. Snowflake (ticker: SNOW), the cloud-based data warehousing company, delivered the year’s biggest software IPO when it went public in September, raising $3.86 billion. The $2.36 billion offering from Lufax (Lu), a Chinese lender, in October ranked second. In June, Dun & Bradstreet (DNB), the business analytics company, collected $1.98 billion and placed third, Dealogic said.
Public market investors will continue to seek high-quality software business models that tout strong barriers to entry, such as network effects—which refers to the trend of companies that get better as more people use their technology—and enjoy subscription revenue that includes high retention rates, high gross margins, and low customer acquisition costs, Jaffe said. Compared with other big market sectors such as banking and technology, which have few really sizable companies, the software market “continues to create more billion-dollar winners than any other industry, past or present, and public market investors want exposure to this profitable growth,” Jaffe said in an interview.
Insight invests in software companies. The New York technology-growth firm had three software companies go public this year: Duck Creek(DCT), nCino (NCNO), and JFrog (FROG). Each posted strong debuts with nCino shares nearly tripling in their first day of trading in July. Insight also had four top-performing IPOs in 2018: Smartsheet (SMAR), Pluralsight (PS), DocuSign (DOCU), and Tenable (TENB). “People are starting to appreciate the power and resilience of subscription business models,” Jaffe said.
The Covid-19 pandemic, which caused the shutdown of thousands of businesses and forced many employees to work from home, has helped some software companies. The virus forced many companies to adopt new technologies, particularly software in the cloud, he said. Zoom Video Communications (ZM) and telehealth-software providers have seen increased demand because of the virus, Jaffe said. For example, shares of Teladoc Health (TDOC), which virtually connects users to doctors, have gained 48% since March and rose to $190.50 on Wednesday. In August, Teladoc agreed to buy rival Livongo in an $18.5 billion deal.
The pandemic also spurred sleepy companies, which might have waited years to adopt new technology, to grow. Jaffe pointed to Mural, an Insight portfolio company that offers visual collaboration software for the workplace, that has experienced an uptick in demand because of the pandemic. Once companies improve their offerings with the new technology they will likely “not go back to the way things were,” Jaffe said.
The virus has helped weed out the weak performers. Companies often claim they have strong new-subscription revenue, high growth margins, and declining customer acquisition costs during good times. But if they can show that performance “during the dark times, then the signal is that much clearer,” he said.
Covid-19 pushed companies to be aggressive, but so has Insight. The private-equity firm raised $9.5 billion with its 11th flagship fund in April. Insight has made 25 software investments over the past eight months, which “is in the ballpark” of the number of deals the firm completed in 2019, Jaffe said. Insight is “leaning in with more conviction” during the global pandemic. Because a company performs well during Covid-19 doesn’t mean it is “a great investment, but it’s a much stronger signal than normal times.”
The success of special purpose acquisition vehicles is another trend that will continue in 2021, Jaffe said. This year, 381 new issues have traded, raising $139.4 billion, according to Dealogic. Of the 381 IPOs, more than half, or 198, were SPACs.
This is a big change from just a few years ago when SPACs were looked down upon, Jaffe said. The view at the time was that only companies that couldn’t succeed with a traditional IPO opted to go public via what are also known as blank-check companies. That changed when more high-quality companies sought to merge with SPACs. For example, Opendoor, a real estate start-up, agreed to a $4.8 billion merger with Social Capital Hedosophia II (IPOB), the SPAC from Chamath Palihapitiya. Palihapitiya’s first SPAC, Social Capital Hedosophia, merged with Virgin Galactic (SPCE) in 2019.
Blank-check companies have crossed over and become more credible, similar to how junk bonds gained more acceptability and morphed into high-yield bonds, Jaffe said. Like direct listings, which were once expected to replace traditional IPOs, SPACs are another tool for companies seeking to go public, he said.
SPACs aren’t going away, in fact the number of announcements is accelerating, Jaffe said, but some that will do well, while others won’t. “At the moment, SPACs are still front and center as an important new phenomenon.”
Write to Luisa Beltran at [email protected]
