Unicorns seek to join Wall Street bulls in ’19

Wall Street may want to commemorate 2019 by flanking its famous bronze charging bull with sculptures of stampeding unicorns.

Six Bay Area “mega-unicorns” — private tech companies valued by investors at more than $10 billion each — are likely to thunder into the public market next year, raising buckets of cash for themselves and minting new wealth for their investors, executives and employees.

That would make 2019 the biggest year for tech debuts since Facebook’s 2012 initial public offering. The difference this time: It’s not just one company, and five of them are based in San Francisco, which could see a concentrated injection of wealth as the nouveaux rich-

es buy homes, cars and other big-ticket items.

“Wealth effects, including from IPOs, are an important driver for the Bay Area economy, with more impact here than most metro areas around the country,” said Scott Anderson, chief economist at Bank of the West in San Francisco.

Rohit Kulkarni, managing director and head of research at San Francisco’s SharesPost, which runs a marketplace for shares of private companies, viewed things similarly. “It’s a clear windfall for many investors as well as employees, and the (money) will funnel back into the Bay Area,” he said.

Most of the companies are household names. They include the world’s most-valuable private startup, Uber. CEO Dara Khosrowshahi has said it is “on track” to go public next year. Rival ride-hailing company Lyft is reportedly already gearing up for its debut, trying to beat Uber to market, according to multiple published reports. An Airbnb IPO, which could be in either 2019 or 2020, may spread some wealth among its super hosts. In May, CEO Brian Chesky said, “We will be ready to IPO next year, but I don’t know if we will.” The vacation-rental company last month asked the Securities and Exchange Commission to change rules about employee stock options so it could award preIPO stock to its “most loyal hosts.”

The agency has already been considering updates to stock options for gig-economy workers, which theoretically would mean that Uber and Lyft could reward loyal drivers with stock options. Neither has given any indication of considering this, however.

Payment-processor Stripe likewise is looking at either 2019 or 2020 for its debut. Pinterest is targeting a midyear public market debut, according to published reports. Palo Alto’s Palantir is reportedly eyeing a 2019 IPO as it achieves profitability. The corporate datamining firm is the only one of the six not in San Francisco and not consumer-facing.

Besides the megacompanies, plenty of other local unicorns may debut next year, such as Emeryville security company Tanium (worth $6.5 billion) or San Francisco workplace-messaging firm Slack ($7.1 billion).

The success of this year’s tech debuts — Dropbox, DocuSign, Eventbrite, Zuora, SurveyMonkey and Up work, for instance — makes it more likely that other tech players will try to hit Wall Street next year, experts said.

“They’ve been putting it off for years,” said Matt Kennedy, senior IPO market strategist at Renaissance Capital, a provider of institutional research. “Now it makes sense. The window is open. The S&P is at all-time highs. Investors are comfortable with heavy losses and putting a priority on growth, so these companies can get sky-high valuations on the public market.”

In the year’s first nine months, 44 tech IPOs brought in $17 billion, according to Dealogic. That’s more than tech IPOs reaped for 2016 and 2017 combined. Holding back some firms from going public is the fear that public markets will assign a lower valuation than the last private valuation. That’s an unwelcome circumstance that can trigger protective clauses that reward investors and punish employees and founders. That happened to Square in its 2015 IPO.

That’s happening less and less frequently: In 2017, one-third of IPOs cut companies’ valuations as they went from private to public. In 2018, that ratio has dropped to one in six, Kulkarni said.

“The public markets are receptive and the water’s warm,” he said. “It’s a golden age for IPOs.”

Some of that gold should find its way back to the unicorns’ hometowns.

To start with, there’s San Francisco’s payroll tax, which is unique among California cities. It’s been lowered in phases and now stands at 0.38 percent. San Francisco companies pay that amount on their workers’ compensation, including exercised stock options. The city’s “Twitter tax break,” which temporarily exempted some MidMarket companies from part of that, has expired.

Then there’s spending by newly cash-flush workers. “It could be a significant injection of wealth into the regional economy,” said Ted Egan, San Francisco’s chief economist.

That’s especially true among the biggest item people buy: real estate.

“We’ve seen big spikes in the housing market around IPOs and big VC investments,” Egan said. “When Uber was getting billions in VC a few years ago, it showed up in the housing data for the city. When Facebook went public, it showed up in the statistics for San Mateo County.”

But that’s a doubleedged sword. Lots of people snapping up multimillion-dollar homes enriches the coffers of the county, the school system and community colleges through higher property taxes and transfer taxes, but makes housing even more unaffordable for everyone else.

San Francisco’s median home price already stands at $1.13 million, per CoreLogic’s September report, and has vaulted 10 percent in the past year.

“Housing affordability will likely deteriorate further for many households; we’ll see that gap widen between the haves and have-nots,” Anderson said. “Rents will get pushed up as well. We could see intensifying migration out of San Francisco for people who can no longer keep up.”

A longer-term wealth infusion could come if the proceeds from the Wall Street debuts fuel a new crop of startups.

“With all that money floating around, some will find its way into new businesses that could lead to another round of IPOs down the road,” Egan said.