Class of 2018 | colbys@wharton.upenn.edu

This past year, the tech sector showed strong growth and busy M&A activity. Within tech, the gaming industry reported $30B worth of deals in 2016 alone (Figure 1). This was a new record for gaming mergers and acquisitions, mostly in the mobile sector, and notably the acquisition of Candy Crush developer (King), which closed at $5.9B. In addition to mergers and acquisitions, investments in the gaming industry included research and development in new technologies, mobile, web, and augmented reality / virtual reality (AR/VR) among others. The highly anticipated Oculus Rift introduced consumers to VR and Snapchat Spectacles, which drew more excitement than Google Glass and brought attention to the opportunities of wearable technology. The “unicorn” companies continue to grow and investors wait in anticipation for not only tech M&A, but the tech IPOs expected to take off.

Many unicorn companies are likely looking to go public through an IPO in the coming year. Unicorn companies are private companies valued at one billion dollars or more and, in total, have a collective valuation of approximately $770B. These companies are predominantly in the tech industry and have been growing rapidly, which is largely due to companies staying private longer, increasing their valuation. Among the unicorn companies, Snap (ticker: SNAP) recently announced its IPO in early February, and Airbnb may follow suit. Snap has rebranded itself from a social platform to a camera company and had introduced the Snapchat Spectacles (Specs) late last year. The introduction of Specs, far more than just a toy, added wearable technology to Snap’s business model and was well-received by consumers, who were much more open to purchasing Specs than Google Glass. The video glasses were released in an enigmatic manner and were only somewhat attainable, differing from launches of most consumer products. However, this does not differ from Facebook’s initial release, where the company rolled out down the social hierarchy and drew demand from exclusivity. Snap released its new product in “Snapbots” that are only available in LA and NYC (where consumers look for the coolest trends) and put limitations to how many consumers could purchase at once. The Specs have already become incredibly trendy but getting a hold of them requires a lot of luck, and the exclusive, ambiguous aspect of them has attracted attention. Snap quietly purchased a struggling startup specifically for Specs in 2014 and the company, which has also toiled with AR and drones, will likely create new technology and drive innovation for Snap.

Both the challenges and optimism around Snap will influence the outcome of the IPO. Now that it has rebranded itself, it no longer has the profit margins of an internet company and the IPO will deviate from that of a purely tech startup. In terms of revenue and number of employees, Snap more closely resembles Twitter than Facebook. However, the company is hoping to repress that belief on its roadshow this year. Now that Facebook’s market cap is more than 30 times Twitter’s, the only thing Snap wants to convey to its investors is that it closely resembles Facebook, not Twitter. Snap’s current valuation is about $20B to $30B and the IPO will likely be valued closer to $20B. The co-founders, Evan Spiegel and Robert Murphy, will be the largest shareholders, each with 21.8% of the company’s class A shares, jointly owning almost 44% of the company even after having raised $2.6B in funding. However, the remaining equity for Snap’s $3B IPO comes with a caveat: shareholders will not have voting rights. The limitation adds more risk to investors and Snap’s valuation may consequently suffer. While some investors are avoiding the risky investment, Snap’s revenue growth and unique products present an interesting and exciting opportunity.

After Snap’s announcement, there is much anticipation for the next tech unicorn to go public. Investors are hoping Snap will spur the tech unicorn IPO market; given the valuations and company-specific factors, Uber, Airbnb, or Spotify may be next to launch an IPO (Figure 2). Given the current market conditions, it will no doubt be an exciting year for IPOs and unicorns.