Here’s why IPOs could heat up in 2017, especially for enterprise startups

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Next year could see the flurry of new initial public offerings of stock, including some top prospects in enterprise and cloud technologies, that were supposed to happen in 2016 but didn’t materialize.

That’s according to a new report out today from the venture capital research firm CB Insights. Of course, there was a healthier number of IPOs this year, including successful offerings by Twilio Inc. and Nutanix Inc. — just not as many as some investors had expected in a year when the stock market did pretty well even before the post-U.S. presidential election rally.

The fifth annual Tech IPO Pipeline Report looks at what CB Insights considers the most highly valued and high-momentum private companies, this year numbering 369. That’s down from last year’s 531, thanks to a more stringent choice using the company’s Mosaic scoring algorithm that looks at customer signings, investor sentiment, hiring and other activity.

So why the confidence in IPO flow for next year? The research firm reckons that as these companies mature even more, investors will get antsy for a big exit, which is often an IPO. What’s more, mutual funds and hedge funds that poured a lot of money into pre-IPO startups in 2014 and 2015 but have since cooled their investing. As a result, the report says, “the drumbeat for a busier 2017 is getting louder.”

Based on CB Insights’ Mosaic algorithm, which it describes as a sort of FICO score for private companies, five companies look the most likely to IPO next year: customer analytics software firm Qualtrics LLC, meal delivery service Blue Apron Inc., subscription management service Zuora Inc., identity management service Okta Inc. and technology learning service Pluralsight LLC. Update: Well, knock Blue Apron off the list, at least for early 2017: It has put an IPO on hold to tend to financials, according to Bloomberg.

Missing from the very top of the list are uber-unicorn companies such as ride hailing firm Uber Technologies Inc. and lodging rental marketplace Airbnb, which have so much interest from private investors that they have no need to go public with all the attendant public scrutiny of short-term financials.

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But those and some 34 other unicorns, or companies that are valued at more than a billion dollars, are among the rest of the top 36 prospects prospects. The list also includes well-known consumer Internet companies such as Snap Inc., Buzzfeed and Instacart, as well as more enterprise- or business-oriented startups such as Slack, Stripe, Palantir, Cloudflare and Domo.

Not surprisingly, Internet companies dominated, with 269 out of the 369 in the pipeline. Drilling down further into the Internet category, enterprise industries dominated. Business intelligence, analytics and performance management led the way, followed by monitoring and security; accounting and finance; human relations and workforce management; advertising, sales and marketing; and customer relationship management.

As CB Insights points out, some of those companies could get bought, even some large ones in the wake of Microsoft Corp.’s $26 billion acquisition of LinkedIn Corp. this year. Others could just as easily stumble, or even join the deadpool.

Still others may decide to hold off because their growth isn’t fast enough or they haven’t reached the $100 million revenue mark and clear path to profits that many investors want to see. And despite the recent stock market run, or perhaps because of it, the market could turn volatile and prompt companies to stay private.

Money flowing to the IPO pipeline companies dropped this year, and is set to drop again in 2017. But it’s clear that investors are continuing to make big bets. Overall this year, IPO pipeline companies collectively raised nearly $22 billion in funding. The 369 companies have raised a total of more than $82 billion since 2000.

Two relative newcomers to venture capital joined the list of the top 10 investors with the most IPO pipeline companies: No. 1-ranked Andreessen Horowitz, which also had the most unicorn companies with 17, and GV, the former Google Ventures. Both firms were founded in 2009.

If GV and CapitalG, the new name for Google Capital, were combined, they would actually top the unicorn IPO pipeline investors, with 21 companies. Not surprisingly, rounding out the top five after a16z are prolific and successful investors SV Angel, Sequoia Capital, Accel Partners and New Enterprise Associates.

CB Insights isn’t alone in its IPO optimism. PricewaterhouseCoopers also issued a mildly positive outlook Monday. “After a slow start in 2016, activity picked up in the latter half of the year and there was a resurgence in the broader markets, both helping to create favorable conditions for companies that are looking to go public in 2017,” Derek Thomson, PwC’s Capital Markets Research leader, wrote in a blog post. “Companies should prepare early in order to take advantage of opening IPO windows in 2017.”

Images courtesy of CB Insights