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Nicholas Megaw in New York

Mar 05 2023

US-listed tech companies face cash crunch after burning through billions from IPOs

Technology groups that have recently listed in the US burnt through more than $12bn of cash in 2022, with dozens of companies now facing difficult questions over how to raise more funds after their share prices tumbled.

High-growth, lossmaking groups dominated the market for initial public offerings in 2020 and 2021, with 150 tech groups raising at least $100mn each in the period, according to Dealogic data.

As the proceeds from the dealmaking frenzy start to run low, however, many face a choice between expensive capital raises, extreme cost cutting, or takeover by private equity groups and larger rivals.

“[Those companies] benefited from the very high valuations but unless you’re really bucking the trend your stock is way down now. That can leave you kind of stuck,” said Adam Fleisher, a capital markets partner at law firm Cleary Gottlieb. “They have to figure out what is the least bad option until things turn around.”

Last year’s market downturn led to widespread talk in tech circles of a newfound focus on profitability and cash generation, but a Financial Times analysis of recent filings highlights how many companies still have a long way to go.

Of the 91 recently listed tech groups that have reported results so far this year, just 17 reported a net profit. They spent a cumulative $12bn in cash last year — a total that would have been even worse were it not for the standout performance of Airbnb, which generated more than $2bn. On average, cash-burning companies spent 37 per cent of their IPO proceeds during the year.

About half of the 91 were lossmaking at an operating level — meaning they could not simply cut back on investments if they needed to conserve funds.

Meanwhile, their shares have declined an average of 35 per cent since listing, making further share sales appear expensive and dilutive for existing investors.

Fleisher predicted that “some will sell equity on the cheap if they’re very desperate . . . [but] there has not been robust follow-on activity” so far.

Falling valuations are partly due to rising interest rates, which reduce the relative value investors place on future earnings. However, the declines also reflect concerns about the near-term outlook, which could add to the challenges of reaching profitability.

Ted Mortonson, a tech strategist at Baird, said: “Going into 2023 [order] pipelines were good, but the problem is getting new orders to replenish that . . . it’s kind of a universal problem . . . [and] it’s going to get harder through the first half.”

Some companies are simply hoping they raised enough money while times were good to ride out the storm. Carmaker Rivian — which was not included in the analysis — spent a massive $6.4bn in 2022, but chief financial officer Claire McDonough this week said she was “confident” that it had enough cash left to last until the end of 2025.

Others are not so lucky. At least 38 of the cohort have already announced job cuts since their listing, according to Layoffs.fyi, a tracking site, but more may be required: if last year’s burn rates were maintained into 2023, almost a third of the groups analysed by the FT would run out of cash by the end of the year.

The pressures have led to an uptick in takeovers that experts expect to accelerate.

“I believe you’re going to see a move out of the public markets — a lot of these companies would [traditionally] have baked for longer behind the veil of being a private company, and maybe they need more time in that space,” said Andrea Schulz, a partner at audit firm Grant Thornton who specialises in tech companies.

Baird’s Mortonson pointed to a recent deal spree by Thoma Bravo as a blueprint that other private equity firms would follow. Thoma Bravo last year agreed to buy cyber security company ForgeRock barely 12 months after its IPO, along with the slightly more established groups Ping Identity and SailPoint, which listed in 2019 and 2017, respectively.

“[Private equity firms] know a lot of these companies have to get scale, so they are acquiring the pieces to get those platforms,” Mortonson said. “[They] can buy in low . . . and one day in a few years’ time you will see combined entities go public again.”

This route can also come with complications, however. The ForgeRock deal is being probed by the US Department of Justice, and Schulz said antitrust pressure could put off some of the larger tech companies that would traditionally be tempted to scoop up businesses at a discount.

In other industries, the tough market has encouraged borrowing through convertible bonds, debt that can be converted to equity if a company’s stock hits a certain threshold. However, the terrible performance of a previous wave of convertibles issued by high-growth companies has made investors wary of tech groups.

Companies such as Peloton, Beyond Meat and Airbnb issued bonds in early 2021 that paid zero interest and would now require a massive share price rally to hit the point where they would convert to stock.

Michael Youngworth, convertibles strategist at Bank of America, said the market was currently dominated by larger companies in “old economy” sectors. “The right [tech] name with some less bubbly terms than those we saw back in 2021 would be able to get a deal done . . . [but] conversion premia will have to be a lot lower, and coupons would have to be much higher.”

Some companies are turning to more straightforward — but expensive — loans. Silicon Valley Bank chief executive Greg Becker told analysts earlier this year that the lender had seen a sharp increase in borrowing from technology companies that previously would have sold shares.

But for some companies, none of the options are likely to be appropriate. Schulz said the rush to list while valuations were high was causing a public reckoning that would traditionally have played out in private.

“What the public are now seeing is something that was [previously] digested in the VC space . . . [companies] are proving out on the public stage whether or not they have a viable product or market for their product, and there will be mixed outcomes. Some of them may cease to exist or get ‘acqui-hired’,” the practice of buying a company to recruit its staff.

Written by Nicholas Megaw in New York · Categorized: entrepreneur, Technology · Tagged: entrepreneur, Technology

Feb 08 2023

Chinese tech group’s Nasdaq IPO signals revival for offshore listings

A Shanghai-based maker of sensors for cars has become the largest Chinese group to go public in the US since 2021, in a deal that exchange executives hope will ease almost two years of tensions during which such listings ground to a halt.

Hesai Technology, which supplies laser-based sensors to carmakers and autonomous driving companies, on Wednesday raised $190mn from investors — more than it had originally planned — in an initial public offering on the Nasdaq stock exchange that valued it at around $2.4bn.

Bob McCooey, Asia-Pacific chair at Nasdaq, said he was hopeful the deal would be a “seminal” event after a series of positive developments in recent months “cleared the dark clouds [that] hung over the US capital markets for Chinese companies”.

More than 200 Chinese companies worth a combined $1tn are listed on US exchanges, according to the US-China Economic and Security Review Commission, a group created by Congress to examine the national security implications of trade and economic relations between the two countries.

China became the dominant source of foreign listings in the US in recent years and a lucrative font of income for US exchanges, but rising political tensions, regulatory disputes and the disastrous $4.4bn listing of ride-hailing group Didi Chuxing brought an abrupt end to the trend in 2021.

Didi was forced to delist less than 12 months after it made its debut on the New York Stock Exchange, amid a string of Chinese regulatory probes that saddled investors with billions of dollars in losses.

A stand-off between Beijing and Washington over the inspection of Chinese companies’ audits also threatened hundreds of companies with being forcibly delisted, but a breakthrough was reached last December.

Hesai becomes the first Chinese company to raise more than $100mn in the US since October 2021, according to Dealogic data, and the largest Chinese technology group to list in New York since Didi.

The deal also marks the return of some of the largest western banks to US-China deals, with Goldman Sachs, Morgan Stanley and Credit Suisse all underwriting their first deal since 2021, according to Dealogic.

“With three of the major players in the Asia region all on this IPO, I think that bodes well,” McCooey said.

He said he was hopeful that the renewed regulatory clarity and recent improvement in equities prices created “an opportunity for a deep pipeline [of IPO candidates] that has existed since before the middle of 2021 and [that] has continued to grow”.

The Nasdaq Golden Dragon Index, which tracks shares in US-listed Chinese companies, has risen 66 per cent since the end of October, buoyed by the apparent end of the delisting threat and China’s re-emergence from its zero-Covid strategy.

There are unlikely to be many further deals in the first quarter, as next Tuesday marks the last day for companies to go public without providing updated financial figures, but McCooey predicted “you’ll see more coming in the second quarter and as the year progresses”.

The Financial Times reported last month that Shein, the Chinese fast-fashion behemoth, expects to list in the US as early as this year.

Still, while the outlook is improving, some remain cautious. “I think we’ll see some smaller and midsized [deals], but for the larger ones . . . they would need to have a very compelling reason not to list in Hong Kong . . . [and] would have to make sure they have a strong understanding of what the government sentiment is” to avoid a repeat of the Didi fiasco, said a trader who works on IPOs.

Hesai’s prospectus also warned that though the US audit regulator’s threat of delisting has been lifted for now, it will need to make the same decision each year in future. The company also noted that during preparations for the listing it suffered from a “lack of sufficient skilled staff” with knowledge of US accounting requirements.

Describing itself as the “global leader” in lidar technology, which is used for driver-assistance systems such as parking sensors as well as more advanced fully autonomous vehicles, Hesai reported revenues of Rmb793mn ($112mn) in the first nine months of 2022 and a net loss of Rmb165mn.

Its current shareholders include Chinese internet group Baidu, China-focused venture firm Lightspeed and German auto-parts specialist Bosch.

Written by Nicholas Megaw in New York · Categorized: entrepreneur, Technology · Tagged: entrepreneur, Technology

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