2019: Tech IPOs = Boom for Crypto?

Source: Alex Welsh for The New York Times

This post is the result of an evolving conversation about the potential impact of the 2019 Tech IPO boom on the emerging digital asset class. The wave of tech IPOs expected in 2019 has already begun this year with the likes of Lyft, Zoom, Pinterest, and PagerDuty going public in the early months of 2019. 
 
 I decided to compile a list of the top 20 tech IPOs expected to go public this year in 2019 and their corresponding valuations and funds raised to estimate their potential impact on fund flows into the digital asset class. 
 
 We have already started hearing about some of the knock-on effects of this economic windfall including the potential effects on the SF housing market
 
 In the table below, I have compiled the top 20 Tech related IPOs expected this year (2019) and sorted by their last estimated valuation. Many of these large and well-known companies have decided to take advantage of the public equity market rally in 2019 to bring their company into the public markets at an opportune time and with a somewhat favorable economic background. Q1 2019 GDP expanded by 3.2% after all, beating many early expectations and yet again giving support to an already rallying stock market through the first four months of the year.

2019 Tech IPOs: Valuation and Liquidity Impact

US Venture-backed companies have taken longer to go public, opting instead to stay private longer. This can be attributed to the abundance of private market capital available for later funding rounds, and also to the stricter reporting standards of a public company, especially ones still in major growth mode. Of note, CB Insights recently reported in its Tech IPO Pipeline Report that the median time between first funding and IPO for US VC-backed tech companies that went public has increased from 6.9 years in 2013 to 10.1 years in 2018. The median for the 20 companies above is 10 years, consistent with CB Insights’ findings. 
 
 So what potential impact will the 2019 Tech IPO Boom have on crypto markets? 
 
 It is important to understand the importance of fund flows on asset classes. Since the digital asset market is still fairly small when compared with other major asset classes, a significant inflow into the space can make a major difference. This is why a pending ETF approval or the “wall of institutional capital” are such important and frequently discussed items, since both would likely bring large sums of new investment capital to the space, increasing overall demand for cryptoassets and subsequently overall network value. Having traded illiquid high yield credit markets at JPMorgan for 11 years, I truly understand the importance of fund flow dynamics on market prices. 
 
 To provide context on global asset flows, let’s take a look at the Global Direct Fund Flow Table below from Morningstar. $353 bln went into equity funds and $156 bln went into fixed income funds in 2018. These are large absolute numbers, but small relative to the total size of capital in those asset classes and represent ~2% each of their total invested dollars into direct funds in those categories (far right column).

Morningstar Direct Asset Flows Report for 2018

Now let’s take a quick look at where we stand as far as digital asset market size. Currently, the public crypto markets have a reported network value (market cap) of ~$157 bln, with bitcoin dominance at 58% of that liquid market, or ~$90 bln in network value. (Source: OnChainFX). 2018 saw a large drawdown in the asset class with bitcoin down ~74% in 2018 and other market indices down ~80–90% from a peak total network value of over $800 bln in Jan of 2018. 
 
 Looking to the table below, using the latest estimated valuations, the combined value of the 20 Tech companies is ~$300 bln, on ~$54bln in total funding raised. I believe that a large amount of the tech IPO proceeds will be recycled into allocations and investments into blockchain, crypto, and digital assets. I hold this opinion, because I believe savvy early employees and tech investors who will have profited from time, energy, and investment into many of the web 2.0 companies going public ~10 years later will recognize the opportunity in front of them to invest into the next iteration of that in web 3.0 and the evolving digital asset class.

2019 Tech IPOs: Valuation and Liquidity Impact

To estimate the effect on the space, I added a couple columns to estimate the amount of value held by early employees and early VC investors who would most likely be vesting earlier than others and could potentially use the newfound liquidity to invest into the digital asset space. I used a conservative estimate of 10% for early employees and 15% for early VC (below normal 20% ownership for a standard Series A round). For just these selected 20 Tech IPOs, I estimate that early employees and early VC investors will hold ~$75 bln of the public float. I want to stress that these are only estimates and that actual holdings will significantly vary based on the company, vesting schedules, tax implications, and many other factors. Alternatively, taking just a simple 20% of total overall value for the top 20 results in ~$60bln of value. 
 
 For simplicity, let’s say that 20–25% of the total value of the top 20 Tech IPOs get recycled back into digital assets over a 12-month period. What effect will this have on the current market? Using some of the previous work by Chris Burniske on the fiat amplifier for fund flows in crypto, we will use a conservative low end of the range estimate of 2–5x the fiat inflows. 
 
 That means that if $60–75 bln of fiat proceeds from tech IPOs get recycled into crypto markets over the next 6–12 months, we could see a $120–375 bln impact on the digital asset market from only this one source of capital alone. Remember, that the current market size is only ~$157 bln, extremely small compared to the $73 Trillion of Global Stock Markets. The inflows of this magnitude could result in a meaningful increase in the overall size of the market from demand-based fund flows alone, not accounting for any market appreciation as a result. 
 
 There is, of course, no way to tell exactly how new IPO wealth will be allocated across assets, and these fund flows may never materialize. However, this quick analysis shows the potential significant impact that the newfound wealth and liquidity from the 2019 Tech IPO Boom could have on digital asset markets if a portion of this capital rotates into the sector. Nothing in this analysis should be taken as investment advice of any kind. Estimates and opinions are solely used for illustrative purposes.