The IPO boom was helped by the emergence of Shanghai's Star market and the trend for reverse mergers, while corporate venturers were increasingly looking outwards.

What a long, strange year it’s been. This time last year, a coronavirus was just emerging in Wuhan, China had yet to be named covid-19, but it has since spread into the first worldwide pandemic of this century, driving people indoors and causing havoc throughout near enough every country on earth.

However, the social distancing measures widely introduced had an interesting side effect: in many ways it hastened the digital and app-based transformation touted by so many founders and tech investors in recent years. After a late February market crash that was eased by government intervention, share prices soared for tech companies, which in turn led to a thriving IPO space.

 

The IPO boom continues

Although there were some huge acquisition deals in 2020, particularly in the fintech space, initial public offerings were the main driver of exits for corporate venturers. Any hesitation caused by WeWork’s failed IPO late last year was brushed aside as the dam finally broke in a big way and many of the most highly valued VC-backed tech companies looked to make the leap to the public markets.

Short-term accommodation marketplace Airbnb raised $3.49bn less than two weeks ago in what proved to be the largest IPO of the year, enabling Alphabet’s CapitalG unit to exit. It priced its shares well above the range it had initially set, typical of a year when many companies ended up floating above their range, often in upsized IPOs, and then seeing huge first day pops. Airbnb’s share price had more than doubled from the IPO price at close of trading on its first day.

Food delivery service DoorDash went public the day before Airbnb, in a $3.37bn IPO that provided an exit for SoftBank, floating at a price a third higher than the bottom of its range. Its shares shot up another 50% on their first day. Salesforce-backed data analysis software producer Snowflake Computing raised $3.36bn in a September offering in which it priced its shares 60% higher than the foot of the range and, like Airbnb, its share price more than doubled on its first day of trading.

As indicated above, many of the larger IPOs came at the tail end of the year, with JD.com-backed mobile commerce platform developer Wish raising $1.1bn last week while JD Health, the medical and healthcare services provider spun off by JD.com, floated in a $3.48bn offering at the start of this month, and insurer Ping An’s financial services spinoff, Lufax, bagged $2.36bn in November. The fever was so intense it actually led to two of the larger planned offerings, for video game development platform Roblox and consumer lender Affirm, being put back to 2021 in the hopes its bankers can price them more realistically.

The biggest of all however was the one that failed to take place. Ant Group, the financial services affiliate of e-commerce group Alibaba, had lined up a $34.3bn dual offering set to take place last month on the Shanghai Stock Exchange’s Star Market and the Hong Kong Stock Exchange, only for the Chinese government to halt it with just two days notice. The reason given was that Ant was failing to meet newly introduced rules regarding the size of online loans, though the decision was widely thought to be related to comments by founder Jack Ma criticising the country’s banking sector.

 

Shanghai emerges as a top IPO destination

Despite the failure of Ant to successfully go public, China also had a bumper year for initial public offerings with a string of big-money flotations fuelled by the emergence of the Shanghai Stock Exchange’s Nasdaq-style Star market as a destination after its founding in July 2019.

A large part of that growth stemmed from the restrictions placed by the US government on some Chinese tech companies, contributing to a regulatory environment seen as increasingly unfriendly for their compatriots, who had flocked there as an alternative to the heavily regulated markets back home.

Although some of the larger IPOs for Chinese companies (including JD Health, Lufax, real estate brokerage KE Holdings and electric vehicle (EV) producer Xpeng) still took place in the US, the Star exchange hosted a $486m IPO for EV battery manufacturer Farasis Energy and similarly large offerings for Huawei-backed fabless semiconductor producer 3Peak, Qihoo360 cybersecurity spinoff Qi An Xin and artificial intelligence chipmaker Cambricon, which counts Alibaba, Lenovo, iFlytek and Tuling Century among its investors. The next is set to be Haier and Bohai-backed facial recognition software provider Cloudwalk, in 2021.

 

The rise of reverse mergers

If the IPO space expanded a little bit geographically, US companies also increasingly opted for different ways of listing their shares. Although several companies, including Airbnb and Roblox, were rumoured to be choosing direct listings where no new shares were issued and no underwriters hired, the only large corporate-backed company to do so this year was Palantir, the data analytics technology provider backed by Sompo Holdings, Fujitsu and Relx, which listed its shares in September at a valuation topping $20bn.

A much more popular option has been reverse mergers conducted with special purpose acquisition companies (SPACs), shell companies that are floated with the express intent of merging with private companies. These will often be accompanied by a nine-figure amount of private investment in public equity (PIPE) financing and a ten-figure post-merger valuation.

Some of the more notable companies to list through SPACs this year include Hyundai, Kia and UPS-backed electric vehicle producer Arrival, Lennar, SoftBank, Access Industries and Alphabet-backed online property listings platform OpenDoor and Baidu, Ford, Nikon and Hyundai Mobis-backed 3D mapping technology provider Velodyne.

We’ve been seeing roughly one reverse merger per week of late in the tech space, but there often seem to four or five SPACs being listed each day, so regardless of how likely they may be to increase in 2021, there are bound to be some that need to be shut. Hopefully, they won’t include the one reportedly set to be filed by SoftBank today, the first to be executed by a corporate venture capital investor.

 

Corporate VCs increasingly look outward

Closer to home, the trend of companies spinning off their corporate venturing entities into independent venture capital firms continued apace.

Of course that’s very different from losing interest, and in many of the cases the corporate in question provided a hefty chunk of funding as part of the move. GlaxoSmithKline anchored a $500m fund for its SR One unit, rebranded as SR One Capital Management and relaunched last month. Santander put up $400m for Mouro Capital in September when it rebranded from Santander Innoventures and established itself as an autonomously managed fund.

Prudential Financial put $300m into the debut fund for VC firm PruVen while Daimler spun off its innovation hub, 1886Ventures, in a deal where it will retain 10%. Panasonic meanwhile showed it believes the model is working, pumping $150m into a second fund for its VC spinoff, Conductive Ventures, in September.

A related development was that corporate venturers began accepting external investment for their newest funds. American Family Ventures raised $213m for its third fund that way in August, with Airbus Ventures linking up with Japanese investors for its own third fund the same month. Info Edge is building its own unit from scratch that way, taking $50m from Temasek.

Comcast Ventures notably went the other way however, as its parent company brought the unit into its business development division and tightened its remit to focus on strategic investments. That may be surprising considering the unit has built a portfolio including unicorns NextDoor, Pony.ai and Bird while notching up exits such as DocuSign, Lyft and Slack, (recently acquired for over $27bn), but perhaps in a time of wider chaos the strategic element of corporate venturing becomes more crucial to a business operating in a rapidly evolving industry.