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Management in Practice

Is the IPO Back in Business?

Sky-high valuations of tech companies and the return of the IPO has an old debate raging again. Is a bubble brewing? Or is this time really different? Sasson Darwish ’94, managing partner at DS Advisory Group, talks with Yale Insights about IPOs, innovation, and the business models for today’s tech companies.

  • Sasson Darwish
    Lecturer in the Practice of Management; Managing Partner, DS Advisory Group

With a surge in IPOs, acquisition offers, and skyrocketing market valuations, observers of the tech sector are wondering if the industry has entered a new bubble. The New York Times’ Bits blog notes, “Wall Street money is starting to worry that it feels like 1999 all over again. Money-losing technology companies are going public at you’ve-got-to-be-joking prices....Is this time different? Out in Silicon Valley, many insist it is. ” But a historical survey shows that “this time is different” has been a common refrain just before financial crashes going back centuries.

The numbers show that the IPO market is certainly climbing steeply. Initial public offerings dropped precipitously during the financial crisis. While the stock market recovered relatively quickly, it has been a slower climb back for IPOs. But 2013 was the best year for public offerings since the tech bubble, according to data from Renaissance Capital. There were 222 IPOs in the U.S. generating $55 billion. That compares with a low of 31 IPOs, raising $25 billion, in 2008 and a high of 406 IPOs, raising $97 billion, in 2000. The early indications are that 2014 will be even stronger than last year, according to analysis from Ernst & Young.

Yale Insights talked with Sasson Darwish ’94 a managing partner at DS Advisory Group, a boutique investment bank that focuses on M&A and fundraising in the tech sector. “We can argue if we have a bubble or not, but it’s not the same bubble as we had in 1999, 2000,” Darwish said. In part that’s because the tech sector has changed. “If you look at companies which are class of ’99, 2000, a lot of them were either a domain name or an idea with really no revenues, just a promise. Very few of them made it or still exist. Today, companies that go public are companies that have revenues. For the most part, they have profits, and if they don’t have profits, it’s by choice, not by default. Most of it goes, obviously, into marketing and R&D. So lessons have been learned.”

The new class of IPOs come from industries that didn’t even exist in 2000, Darwish said. Their pitches are “crossover stories between new media, retail, software, software as a service, social, a lot of advertising and marketing-related companies,” he said. “As appetite for risk goes up, there is more openness to hear those type of stories, and we will see very innovative and cool companies coming to market in the next year.”

As the IPO market has shifted, so has the investment banking system that supports it. A number of big firms went bankrupt or merged during the financial crisis, and according to Darwish, those that remain offer comprehensive services, which may or may not be ideal for any given client. This leaves an opportunity for niche players like DS Advisory Group, which Darwish founded in 2012 after a career at major banks. Darwish said, “We have really a focused view. I do mainly sell-side M&A for media and technology companies. And I have only one way of looking and delivering my services, whereas bigger banks are a little different. I’m not saying it’s better or worse. I’m saying it’s complementary.”