Why you shouldn't expect any more billion dollar tech IPOs anytime soon

Even after a flurry of tech IPOs in the past three weeks, 2016 is poised to be a historically slow year for new offerings.

Coupa Software's Nasdaq debut on Thursday marked the fifth for a venture-backed U.S. tech company since mid-September and followed the smashing success of Nutanix's IPO last week.

It was only the sixth offering all year, and nobody else is publicly on file. We're wrapping up the weakest year for emerging tech offerings since the depths of the financial crisis in 2008, and potentially the second slowest year for venture-backed companies dating to at least 1980, according to data from University of Florida finance professor Jay Ritter.

Brighter days are ahead, or so start-up investors would have us believe. Their portfolio companies have spent the past few quarters rightsizing their businesses, reeling in costs and focusing on a path to profitability, after a public market bludgeoning of cash-burning Silicon Valley darlings like Box, Square and Pure Storage.

But investors shouldn't be expecting a sudden rush for the exits. Scanning the list of 150-plus private billion-dollar companies, there are only a select few that look like good bets to hit the exchanges in short order.

"I don't think there's a stampede and I don't think there should be a stampede," said Kevin Landis, chief investment officer of Firsthand Capital Management, which splits its $250 million under management between public stocks and start-up investments. "There's a decent number of candidates."

Most of the likely IPOs aren't household names. After all, why would Uber or Airbnb make the leap? They have seemingly unlimited access to private capital at sky-high valuations and can avoid the pressure of quarterly results. Dating service Match Group was the last consumer internet IPO, and that was back in November 2015.

There might be one pretty large exception, though: Snap. The parent of Snapchat could debut as early as March in a deal valuing the social media company at $25 billion, The Wall Street Journal reported on Thursday, citing sources familiar with the matter.

Much of the IPO pipeline consists of enterprise-focused businesses more along the lines of Nutanix, which sells data center technology, and Coupa, a provider of software that helps clients track their expenses and invoices in the cloud. For companies that sell to large enterprises, having publicly available financials is critical to winning deals from multinational corporations that need to know that their vendors are on solid footing.

A couple of names on investors' near-term radars are Okta, a developer of identity management and security software, and AppDynamics, which sells technology to help companies monitor the performance of their applications. Both have reportedly hired banks to prepare for IPOs.

MuleSoft, a software developer that delayed an offering last year in favor of more private money, is looking to debut as early as the first quarter, according to sources familiar with the company who asked not to be named because the plans are confidential.

"For enterprise software and systems companies, there's more pressure beyond financing and liquidity reasons," said Jerry Chen an investor in business technology start-ups at venture firm Greylock Partners. "You see a bunch that are reaching that level of maturity."

Chen is confident that 2017 will be better than 2016, though he acknowledged "that's not a hard bet to make." Greylock is an investor in AppDynamics and Okta, and Chen wouldn't comment on their plans.

Representatives from AppDynamics, Okta and MuleSoft declined to comment.

While a handful — or two — of tech unicorns are prepping their financials and gearing up for the scrutiny that comes with IPO roadshows, dozens of others are nowhere close.

Some once high fliers have been leveled. There was the crippling crisis at Theranos, business deterioration at Jawbone and the regulatory crackdown on sports betting sites DraftKings and FanDuel.

Then there are companies like Palantir, Dropbox and Pinterest, with private market valuations in excess of $10 billion and significant business challenges in justifying those prices.

Online survey developer SurveyMonkey could test the public markets, but CEO Zander Lurie said at an event last week that the company is unlikely to sell shares in 2017.

DocuSign is another with reportedly strong financials, but the e-signature company has its own peculiar issue: It's trying to hire a new leader.

Keith Krach, DocuSign's CEO, announced his planned resignation a year ago. The company, valued at $3 billion, invited reporters to a press briefing in March, but canceled it at the last minute after the person it expected to name as CEO took a gig elsewhere. When the company eventually lands Krach's successor, Wall Street will need some time to get comfortable with new management.

"Investors are discerning right now," said Byron Deeter, a partner at Bessemer Venture Partners. "They are gravitating toward companies that are stable, predictable and have a path to profitability."

But count Deeter among the bullish Silicon Valley venture capitalists. U.S. stock indexes are trading near record levels and if that strength continues, the first half of 2017 could see a "rush of high-quality names," Deeter said.

Paul Madera of Meritech Capital got a hint of what investors are demanding on Coupa's road to an IPO. Meritech is an investor in Coupa as well Snapchat and MuleSoft.

The rule for software companies, Madera said, is revenue of $100 million and growth of at least 30 percent, with a model that suggests profitability in nine to 12 months. Investors are willing to accept less growth than in the past in exchange for margin expansion and evidence that companies can be sustainable without requiring additional outside financing.

"They used to be a lot more loose with convergence on profitability," Madera said. "There are way too many companies that have been able to buy growth through sales and marketing."

Revenue in the past six months at Coupa jumped 75 percent to $60.3 million, while its net loss narrowed slightly to $24.3 million. After pricing at the top end of its expected range, Coupa shares jumped 85 percent to close at $33.28. The company is now valued at $1.6 billion.

Nutanix saw an even bigger pop in its debut, more than doubling last Friday after pricing higher than it had previously forecast.

The offering had been on ice for many months. Nutanix filed its original prospectus in December, and then delayed going public in the first quarter amid a stock market swoon that scared off everyone in the pipeline.

Companies that can draft behind Nutanix are in short supply. Nutanix has over 3,700 customers, including insurers, airlines and phone carriers that spend big bucks on computing power, storage and networking. Revenue surged 84 percent in the past year to $445 million.

"There is money looking for growth, but I don't think the floodgates are opening," said Bipul Sinha, a Nutanix board member and CEO of data backup start-up Rubrik.

Sinha noted that a number of richly valued companies still have to spend too much money acquiring users, and some are overly reliant on services revenue, as opposed to more profitable software sales.

If nothing else, late-stage start-ups can look at the successful offerings from Nutanix, Coupa and Twilio, which has quadrupled in value since its share sale in June, as proof that institutional investors have an appetite for new technologies.

There's only so much Facebook, Alphabet and Amazon.com they can keep buying. Legacy players like Oracle, IBM and Cisco aren't growing. And with Salesforce.com, Microsoft, Oracle and private equity firms on an acquisition spree, more software companies are being taken off the market than added to it.

"The older incumbents are not the source of innovation or the source of growth," said Scott Sandell, a partner at venture firm New Enterprise Associates in Silicon Valley. "Investors are very eager to see newly public companies that give them an opportunity to participate in the disruption that we all know about here."

As for where the new IPOs will come from in the next couple years, Sandell recommends looking way past the billion-dollar club.

"There are dozens of companies in our portfolio that could be very exciting IPO candidates in the next 12 to 24 months that have never been considered unicorns," he said.