In late March, headlines mourned a once-robust 2020 IPO environment amid plummeting public equity market woes. Four months into the pandemic, equity indices are making a recovery despite continued macroeconomic headwinds, largely powered by the technology sector. Notably, the Nasdaq, which is heavily allocated to venture-backed industries such as technology and healthcare, has meaningfully outperformed other popular public equity indices like the S&P 500 and the Dow during the COVID-19 crisis.

Similarly, the U.S. IPO market is hot, outperforming the S&P 500 by 45% as of August 5, 2020. Year-to-date, 98 IPOs have priced, 53 of which have been venture-backed, according to Renaissance Capital, an IPO index firm. After three quarters of declines, 24 venture-backed companies went public in Q2, an increase of 60% from 15 in Q1 2020. As of August 5, 2020, the average venture-backed IPO return for 2020 YTD is 59%, vs. 49% for the Renaissance IPO Index (NYSE: IPO), a float-weighted index of U.S. IPO performance, and 3% for the S&P 500. The average 2020 IPO has traded +34% on day one, and +45% total.

IPOs Weighted to Healthcare and Tech

With respect to IPO industry breakdown, healthcare and technology are the most active sectors and generated the largest in total proceeds, and outperformed only by consumer staples companies on an average return basis. 

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SPAC IPOs On the Rise 

Also trending amid the coronavirus pandemic is the formation of special purpose acquisition companies (SPACs), which is becoming an increasingly popular alternative to the traditional and onerous IPO process. Known colloquially as “blank-check companies,” SPACs are shell companies that raise cash through an IPO and then use the proceeds to acquire private companies via reverse merger to take them public. Of the aforementioned 98 IPOs priced this year, 62 have been listed via SPACs, according to Renaissance Capital.

Last October, we wrote about the emergence of direct listings, pioneered by Spotify in 2018, which has gained momentum as an attractive avenue for cash-flow positive startups, particularly in the consumer space. The proliferation of the SPAC IPO in 2020 represents a similar movement; as noted by Proskauer, a leading international law firm and Greenspring's outside fund formation counsel, which recently released the above-mentioned study examining data from 95 SPAC IPOs priced over the time period of January 2016 through June 2020: “The SPAC IPO market has been resurgent in recent years and has continued to accelerate through the summer of 2020. SPACs have gained a foothold as a preferred vehicle for private companies to enter the public markets in these volatile times.”

Indeed, while the SPAC IPO has risen sharply since 2016, both in terms of gross proceeds and number of deals, 2020 is on track to exceed 2019 in both categories. Additional insights from the report include that "through the first half of 2020, there has been a notable uptick in SPAC IPOs with deal sizes of greater than $301mm as a percentage of the total market, and 56% of the SPAC IPOs analyzed had an acquisition period of 24 months, followed by 18 months at 27%."

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High Growth, High Margin Sectors Leading the Charge

Unsurprisingly, the global pandemic has created several dynamics that have resulted in meaningful tailwinds to disruptive, venture-friendly sectors. Telehealth, collaboration and e-commerce have all seen unprecedented increases in adoption as the world adapts to a socially distant reality. The consumer adoption rate of telehealth was 46% in April of 2020, more than 4x that of the 11% rate in 2019. In the week of March 15, 2020, the growth in Zoom app downloads was 300% from the Q4 2019 weekly average. In perhaps the most stunning statistic, e-commerce as a percentage of all retail sales grew by the same amount in just eight weeks as it did over the previous ten years, with year-over-year growth in orders of 129% as of mid-April.

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IPO investors have been particularly constructive on high growth issuers, favoring companies with large total addressable market (TAM) underpinned by sustainable top-line growth, clear product differentiation and competitive moats, a predictable financial model, a defensible and sustainable margin profile, disciplined unit economics and a clear path to breakeven and attractive customer/unit economics.

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This growing tolerance around various levels of profitability is a direct result of the acceleration in the adoption of technology like e-commerce, virtual learning, streaming, telehealth and delivery in a post-COVID world.

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Greenspring's 2020 IPO Exposure

Greenspring Associates has enjoyed strong representation among the 2020 class of IPOs, with indirect exposure to 14 listings via underlying fund investments as of August 5, 2020.

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Our exposure has been largely concentrated in sectors that have benefited from the pandemic, such as cloud software companies and biotech. For example, Lemonade is an InsurTech company powered by artificial intelligence, machine learning and behavioral economics that offers homeowners, renters and pet insurance. Kingsoft Cloud is a leading cloud service provider. One Medical is a membership-based primary care platform with seamless digital and in-office healthcare through a human-centered, technology-powered model. nCino offers a cloud-based bank operating solution for the financial services industry. BigCommerce is an e-commerce SaaS platform that allows merchants of all sizes to build online stores. We believe that venture capital is uniquely positioned to help the world move through the critical challenges facing our society by financing companies that address the accelerated need for digital solutions. As artificial intelligence, robots and machine learning make industries more efficient and effective, we predict that the IPO environment will remain strong for companies disrupting a variety of spaces through technology and are proud to be participants in the innovation economy.

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