Too Hot to Handle? Be careful of tech company IPO’s and their red hot valuations

It’s been a busy year for B2B software companies. Following a relative drought in 2017, the floodgates have opened to a storm of IPO’s, with DocuSign, Pivotal, Zuora, Zscaler, Smartsheet, and Carbon Black all making their recent debut on the stock market, to huge initial success. ZScaler shares that started trading at $16 have rocketed to the $40’s. DocuSign, an electronic signature tech play, soared from $29 a share to $66. The mood is as giddy as the stock price, with every entrepreneur dreaming of their own similar reception and VCs eager to multiply their current – and future – investments.

Software solutions providers are red hot. And that is exactly what makes them dangerous.

In a recent video, host of CNBC’s Mad Money, Jim Cramer warned against the sky-high valuations of tech company IPO’s, that could be that could be prime for a fall.

“when you bet on any of these red-hot enterprise software IPOs, you’re effectively betting that the companies will be able to keep beating the estimates” the former hedge fund manager cautioned investors. When they don’t, and there is an inevitable fall, both shareholders and companies suffer.

This happened just last year when BlueApron and Snapchat, two of the most anticipated IPO’s of 2017, failed to withstand the scrutiny of the public markets and plummeted to become high-profile examples of overheated IPO’s. Investors’ eagerness to grab a piece of the next big pie unrealistically drove up valuations. And if you believe that history repeats itself, the signs are looking sinister, with the recent revelation that business intelligence specialist Domo is no longer worth more than its $1 billion valuation, a red flag for private investors ahead of its planned IPO.

So are we pushing forward towards mass pull back? Well, as Cramer puts it:

“I don’t wanna be the guy who…cries Wolf…but if it happens, hey, at least you know!”

One thing is certain. The market is swamped with tech vendors, all hungry for investment. And VC companies will keep on giving it, because, that’s what VC companies do. But when these ravenous start-ups all descend on the same pool of end-users, the dramatic imbalance between supply and demand becomes clear.

“Since 2012, my VC friends have funded 1242 cybersecurity companies, investing a whopping $17.8bn”, says a cybersecurity seed fund founder. “But chief information security officers say that they don’t need 1242 security products. One exhausted CISO told me they get fifteen to seventeen cold calls a day. They hide away from LinkedIn, being bombarded relentlessly”.

Of these 1242 products, some will succeed, and be bought by the Google and Amazonian behemoths that dominate the market, whilst those can’t handle the heat – and coax their potential buyers out from hiding – will inevitably go bust. End-users need to be more wary than ever in identifying their partners, because their success will impact on the success of their own business. When it comes to red hot IPO’s those who don’t proceed with caution are likely to get burnt.

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