2019 Tech M&A Outlook: Introduction

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For much of 2018, spending on tech acquisitions clipped along at a record pace as everyone wanted to go shopping. Household names like Microsoft, Salesforce, SAP, Adobe and IBM all put up billion-dollar deals last year, after not one of the tech giants announced a blockbuster print in 2017. Meanwhile, private equity (PE) buyers more than did their part in 2018, spending more money on more tech acquisitions than any year in history.

The two buying groups – which, for the first time in history, showed synchronized shopping at the top end of the tech M&A market – combined for a record 108 transactions valued at more than $1bn in 2018, according to 451 Research's M&A KnowledgeBase. That averages out to a head-spinning pace of more than two big-ticket deals announced every week last year in a shopping spree that included riskier and pricier bets than any time since the tech industry got chastised in the dot-com collapse. Everything seemed in place to push 2018 into record territory.

But then winter came early. An equity market rout during the final three months of 2018 sent the major US stock market indexes to their worst losses since 2008. Other exchanges around the world got roughed up even more. Corporate earnings growth started coming back down to earth, with the 20% growth rates from last summer likely to be less than half that level by next summer. Also, once-plentiful credit got harder to find and more expensive as the Federal Reserve raised interest rates four times last year.

With business slowing and concerns mounting, shoppers stepped to the sidelines. (The M&A KnowledgeBase shows that December posted the lowest spending on acquisitions of any month in 2018, less than half the monthly average.) The late slide took last year from 'all but certain' to 'oh so close.' In the end, 2018 came up about one big deal short of topping the previous record. Buyers around the globe spent $573bn on tech and telecom acquisitions last year, just shy of the $574bn recorded in the M&A KnowledgeBase for 2015.

As to whether last year's momentum will continue, most corporate acquirers we surveyed indicated that they still plan to step up their shopping in 2019. More than half of the respondents to the annual 451 Research Tech Corporate Development Outlook in December predicted that their company would be more active in the coming year. The 56% that forecast an acceleration in acquisitions is nearly five times the 12% that expected a slower pace.

Broadly speaking, the 2019 outlook lines up with the prevailing views from our surveys from the two previous years. But it's worth noting that the bullish outlook comes after many of the mainstay acquirers placed an unprecedented number of big bets last year. Corporate buyers announced 74 transactions valued at more than $1bn in 2018, double the number of big prints each year at the start of the decade, according to the M&A KnowledgeBase. Yet as they look ahead to the coming year, strategic acquirers told us those big-ticket purchases didn't dry up deal flow at their companies.

Undoubtedly, some of the corporate confidence that was on display throughout much of 2018 and appears to be set to carry over into 2019 came as their already-stuffed treasuries received the windfall of the earlier tax law changes. Corporate tax rates got slashed from roughly 35% to 20%. More significant for large tech vendors – many of which do more than half of their business outside the US – the tax overhaul did away with much of the penalty for bringing home profit generated overseas.

Of course, not all of the money went to M&A, as tech companies ramped up their own share repurchases to record levels in 2018. Buying their own equity, even at historically high prices, proved far more popular than buying the equity of other companies.

Yet whatever the particular capital allocation decisions each tech giant made, the point is they had a lot of capital to allocate. In addition to the means to shop, they also had the will to shop. Confidence flowed in the executive suites and boardrooms for most of last year. When public companies looked at their stock prices, which had tripled or even quadrupled since the start of the decade, they got a very visible reassurance that business was headed in the right direction. That emboldened them to do deals.

Secure in their strategy and flush with cash, corporate acquirers shook off the timidity they have demonstrated in recent years and started buying boldly once again. (Or, in the case of SAP and Adobe, buying boldly 'twice' again, since both of those companies put up a pair of billion-dollar transactions in 2018.) Big buyers showed that they would pay virtually any price to get deals done, particularly if those deals could be labeled a 'transformative transaction.'

That confidence proved contagious. Tech companies that had only dabbled in M&A placed big bets. For instance, Workday and Twilio announced $1.6bn and $1.7bn purchases, respectively, in 2018 after never having spent more than $100m on a transaction. Additionally, BlackBerry more than tripled the size of its biggest acquisition, paying $1.4bn for endpoint security startup Cylance in November.

Or take the case of IBM, a company that has shrunk every quarter except three over the past six years. Even as some of its growth initiatives of recent years dwindled away, it still managed to pull off the largest software deal in history. The $33.4bn transaction appears pricey by any measure: IBM is paying the highest-ever stock price for Red Hat, and valuing the open source specialist at more than 10x trailing sales. (For comparison, Big Blue trades at about 1x sales. It doesn't even garner a double-digit multiple on a price-to-earnings basis.)

In the annual 451 Research Tech Corporate Development Outlook survey, dealmakers voted IBM-Red Hat as the most-significant deal of 2018. However, underscoring the concerns around IBM's big bet, the survey respondents overwhelmingly selected the same transaction as the most likely to struggle to generate the hoped-for returns. Fellow corporate buyers noted the vast cultural divide looming between buttoned-up Big Blue and the more freewheeling open source vendor.

As another example of last year's adventurous acquisitions, consider Microsoft, which sells about $100bn of proprietary technology every year, splashing out $7.5bn for open source startup GitHub. (Corporate dealmakers voted Microsoft-GitHub as the second-most-significant transaction of 2018, just behind IBM-Red Hat.) The Redmond giant is several years – and, crucially, a chief executive – removed from the time when it referred to open source as a 'cancer' in the software industry. Nonetheless, as acquisition strategies go, a richly profitable, grey-haired software behemoth buying a startup that gives away code to anyone who wants it is about as orthogonal as it gets.

Yet not everyone is loving these deals. Specifically, concerns are coming from customers that the acquired company's products get lost inside the buyer after the transaction closes. In a groundbreaking survey last fall, 451 Research's Voice of the Enterprise (VotE) surveyed more than 1,000 IT users and buyers and found that four out of 10 respondents said they had concerns that one of their key vendors would get snapped up within the next year. Product disruptions and distractions caused by the acquisition were the main concerns about their suppliers, according to VotE: Digital Pulse, Vendor Evaluations.

Coming out of a year in which no deal – no matter the complexities or the price – seemed off the table, what should we expect in the tech M&A market in 2019? In terms of hot spots, it will probably be more of the same in the coming year. Pricing, however, will cool. At least that's the prevailing view from senior investment bankers who offered their thoughts on the market in December's 451 Research Tech Banking Outlook Survey. (We look at M&A valuations and the outlook for 2019 in the next sections.)

Based on their assessment of current pipelines, bankers forecast that the information security (infosec) market will continue to be a bustling bazaar in 2019. That's true even after acquirers in 2018 announced the second-highest number of infosec deals in history, according to the M&A KnowledgeBase. Last year's surge was driven by increased activity by many of the industry's biggest names – Palo Alto Networks did three acquisitions in 2018, with Symantec notching two deals – as well as a record number of PE purchases. And those infosec acquisitions went off at record prices. According to our tally of disclosed and estimated terms, acquirers paid a median 7.3x trailing sales in their security transactions last year, up from 4.5x in 2017 and 3.5x in 2016.

Turning to other sectors of the IT market, there wasn't much change in where bankers expect to be busy in the coming year. In a distant second place behind infosec, enterprise apps held its ranking from the previous year's survey. Application software was followed by the related sector of infrastructure software, which ticked up a spot from the previous survey. Rounding out the Top 5, in order, were the perennially popular segments of mobile technology and internet content and commerce.

In a related question, however, bankers overwhelmingly indicated that many of the broader trends currently sweeping through the IT industry are likely to generate much more M&A activity than any single sector. And among those trends, machine learning (ML) cemented its standing as the technology that will drive the most deals in the coming year. Since ML debuted as an M&A theme in the 451 Research Tech Banking Outlook Survey three years ago, it has taken the top spot each year.

In every edition of the past three surveys, more than three-quarters of senior bankers forecast an uptick in deals for the emerging technology that adds smarts to products such as ERP systems, call-center operations, network traffic analysis and elsewhere. Moreover, the forecast from advisers has come through in actual deal flow. While starting from a low base, ML acquisitions have shown the fastest growth of any segment of the overall enterprise IT market. Over the past three years since the technology topped the bankers' rankings, the number of ML transactions has more than tripled, according to the M&A KnowledgeBase.

ML barely edged out cloud computing as an M&A driver for 2019. That was the strongest outlook for cloud computing since 2016, and in some ways, the reinvigorated standing represents supply attempting to catch up with demand. A recent survey of more than 1,000 IT users and buyers found that enterprises are accelerating their move to the cloud. Respondents to 451 Research's VotE: Digital Pulse indicated that they currently run 44% of workloads on traditional on-premises IT. That level is expected to plummet to just 16% in two years, with various flavors of cloud taking on all of the workloads.

Trailing slightly behind both ML and cloud, the Internet of Things (IoT) drew a bullish forecast from 72% of bankers. We would note that outlook comes after a year in which the M&A KnowledgeBase recorded more IoT acquisitions than any year in history. The number of IoT transactions in 2018 rose almost 20% year over year, while overall tech M&A volume ticked slightly lower.

One of the main reasons why acquirers were able to secure so many big-ticket deals last year is that they were willing to pay up for them. (It's also worth noting that the unprecedented valuations contributed significantly to 2018's overall acquisition spending, all but matching the highest level since the dot-com collapse. The M&A KnowledgeBase recorded $573bn worth of transactions in 2018, nearly equaling 2015's record of $574bn but on 20% fewer deals.)

In 2018, both financial and strategic buyers handed out unprecedentedly rich valuations in their largest transactions. According to our data, in the 50 largest deals done by the buying groups, PE shops paid 5x trailing sales while strategic acquirers paid 6.3x trailing sales. Both multiples were a full turn higher than either group has paid for their big prints since the recession. The 'valuation inflation' showed up most notably in the software industry, where buyers paid a median 7.6x trailing sales in the record number of $1bn-plus deals they inked last year. They had never paid more than 5x sales in any year since the recession, our data shows.

The largess of acquirers across all sectors shows up clearly as we look at the list of transactions that stood out last year:

• Big Blue's big bet on Red Hat valued the open source software pioneer at its highest-ever stock price. At an equity value of $33.4bn, IBM's purchase is as large as the second- and third-largest software deals combined, according to the M&A KnowledgeBase.
• Microsoft picked up GitHub, the software giant's most significant – and most speculative – acquisition in two years. And it paid handsomely for the deal. The $7.5bn purchase probably works out to a valuation of more than 30x trailing sales for the DevOps darling.
• After consolidating much of the semiconductor industry, Broadcom made a puzzling $18.9bn reach for CA Technologies. The cost-conscious acquirer handed out a richer multiple for the target than any of its other purchases of public companies, paying the highest price for CA shares since the dot-com days.
• Atos paid $3.4bn for Syntel as the French giant looked to expand into North America. In the deal, Atos paid a valuation that's roughly 50% richer than the median valuation for other significant transactions in the IT services and outsourcing market.
• Adobe announced its biggest deal yet, handing over $4.8bn for Marketo. The price is more than twice the level the marketing automation provider fetched when it went private two years earlier. Abode also paid a double-digit multiple in its $1.7bn purchase of Magento Commerce in May.
• Underscoring the importance of identity in overall cybersecurity, Cisco Systems paid $2.4bn (nearly 20x trailing revenue, in our estimate) for Duo Security. The transaction represents the largest-ever sale of a VC-backed information security startup.
• KKR shelled out an estimated $8.4bn for BMC, the largest pure software deal in history by a PE firm. The price is roughly 20% higher than the enterprise software vendor's value in its leveraged buyout five years earlier.
• In its biggest purchase (by far), Salesforce paid $6.6bn, or 22x sales, for MuleSoft, the richest multiple ever paid in an infrastructure software deal valued at more $1bn listed in the M&A KnowledgeBase.
• To head off Qualtrics' planned IPO, SAP had to hand over $8bn for the customer engagement software specialist. The valuation worked out to 21.5x trailing sales, which is more than twice the 9.3x trailing sales it has paid in its previous billion-dollar deals, according to the M&A KnowledgeBase.

The astonishingly rich multiples paid in many of 2018's signature transactions may well stand as the high-water mark, according to the 451 Research Tech Banking Outlook Survey. (And we would note that bankers' livelihoods depend in no small part on being sharply attuned to pricing, so their forecast is no mere idle observation.) In a December survey, a record number of respondents to the 451 Research Tech Banking Outlook Survey predicted tech deals going off at lower M&A multiples in 2019.

Fully two-thirds of senior bankers (68%) forecast discounting in deals in the coming year, more than twice the number of bears in the two previous years of surveys. On the other side, just 4% see M&A pricing ticking higher in 2019. The unprecedently pessimistic forecast is almost the exact inverse of the sentiment among senior advisers when the tech M&A market was coming out of the recent recession.

Yet like the recent slide of stock prices, any decline in acquisition valuations would have to be considered in the context of the record levels of both markets. On Wall Street, stocks have been moving steadily higher since the recession ended in 2009, which makes it the longest-running bull market in US history. Similarly, M&A valuations have more than doubled since the start of the decade. (To illustrate, the M&A KnowledgeBase shows that the five largest tech deals in 2009 went off at an average of just 1.6x trailing sales, compared with 5x trailing sales last year.)

The sense that the boom times may be fading in 2019 also came through in our survey of the other main segment of the tech M&A community, corporate acquirers. More than six out of 10 (62%) respondents to the 451 Research Tech Corporate Development Outlook indicated that we are in the late stage of the post-recession M&A cycle. That was 10 times the 6% that said the cycle was just starting, and nearly double the number (32%) that slotted us as in the middle. (Roughly seven out of 10 respondents to that survey work at publicly traded companies, so they have a front-row seat to how the cyclicality is playing out in the equity market.)

If last year's record activity by strategic acquirers represented a dramatic resurgence, the similarly unprecedented rate of dealmaking by PE was more of a continued insurgence. These onetime niche players have now established themselves as the owners of huge swaths of the IT landscape. Yet the already large and continually growing impact of these buyout shops is vastly underappreciated in the tech M&A market.

To understand the expansion of PE in the tech industry, it's useful to take a more historical perspective. Last year, financial acquirers announced over 1,100 tech purchases, according to the M&A KnowledgeBase. That works out to more deals each quarter in 2018 than PE firms announced each year from 2000-09. (To be clear, our tally of sponsor activity includes direct investments by the firms themselves as well as deals done by existing portfolio companies.)

The current head-spinning pace is being driven by massive buyout funds that are built to transact. Vista Equity Partners averaged three announced acquisitions every month last year, while Thoma Bravo clipped along at two transactions per month. That vastly outstrips the M&A pace of even the most-aggressive tech vendor. Most major strategic acquirers run closer to an average of a deal every month or every other month.

To hit their current run-rate, PE firms have expanded their playbook for the tech industry. When they first began really targeting the sector in the middle of the previous decade, buyout shops mostly viewed the tech industry in the same way they viewed other industries where they have put billions of dollars to work.

Broadly speaking, early PE deals in the tech industry shared a lot of the same characteristics as their handiwork in the retailing and manufacturing sectors, for instance. Regardless of the industry, buyout firms primarily went after big targets that generated a ton of cash but may not have been growing much, if at all.

That profile seems a bit quaint these days. Financial buyers are increasingly paying growth multiples, much richer than the traditional 'value' acquisitions they put up previously. (Or as some observers would have it: 20x EBITDA is the new 10x EBITDA.) Further, in some cases, the companies they are pursuing aren't even generating any cashflow. This is a radical departure from the traditional PE practices since in most other industries, the cash generated by the acquired business goes to support the leverage that buyout firms use to purchase the business in the first place.

The result of those adaptions to the tech industry is that the list of hardware and, especially, software targets got a whole lot longer for PE shops. For instance, deeply unprofitable software companies that were still spending heavily in growth mode – and were valued as such – suddenly popped up as potential acquisition candidates. The twin themes of growth targets securing rich valuations came together in Vista's take-privates of MINDBODY and Apptio late last year. Vista paid slightly more than 8x trailing sales for both of those software vendors, which were still burning cash.

With PE firms sitting on an ever-increasing amount of funds available for an ever-increasing number of targets, they have reshaped the tech M&A market. Buyout shops have posted consecutive increases in the number of deals every year since 2012, with total volume nearly tripling during that period, according to 451 Research's M&A KnowledgeBase. In many ways, PE firms, which have tallied more than 2,700 tech transactions over the past three years, are now the market makers in the tech industry.

Their ascent certainly comes through when we look at PE activity on a relative basis. Since the start of the decade, buyout shops have more than doubled their share of the tech M&A market, as calculated by the M&A KnowledgeBase. They now account for nearly one-third of all tech deals. At the same time, the number of tech transactions done by publicly traded companies has slumped below the number done by their rival financial acquirers.

What this means, effectively, is that financial acquirers have disrupted the tech M&A market. In a historic reversal, PE firms blew past their strategic rivals in 2017. They carried that momentum in 2018, and put up more tech acquisitions last year than publicly traded companies did at their peak. To put some numbers on that, the M&A KnowledgeBase lists a stunning 1,126 tech deals announced by PE firms and their portfolio companies in 2018, compared with just 846 transactions done by US-listed acquirers. The number of public company acquisitions barely topped 1,000 in 2014 and 2015, but has declined uninterruptedly since then, according to our data.

Further, the gulf between the two primary buyers in the tech M&A market could get larger in 2019. When asked to assess the competitive playing field in the current tech M&A market, corporate acquirers we surveyed in December said they expected more competition from rival financial buyers than fellow strategic acquirers in the coming year.

More than half (53%) of respondents to the 451 Research Tech Corporate Development said they expected to have to elbow PE firms out of the deals they wanted to do more often in 2019, while just four out of 10 (41%) said the same thing about other corporate acquirers. Although that is the second consecutive survey that the competitors have been ranked that way, it reverses the long-standing order. In the first decade of the 451 Research Tech Corporate Development Outlook, respondents ranked their strategic brethren ahead of rival financial acquirers every single year.

However, while buyout shops are the ones to watch in terms of competition, their returns may not be enviable, according to our survey. When asked about the exit environment for PE owners over the next three years, 50% of corporate buyers predicted that the climate would worsen compared with just 28% who anticipated it improving. Bearish respondents pointed to escalating acquisition prices along with tighter – and more costly – credit for their dour outlooks for future PE exits.

Just as PE has recast its role in the tech M&A market, the VC industry is undergoing a similar transition. Further, the shifts that occurred in 2018 are likely to get amplified in the coming years as the current venture cycle plays out. Essentially, VC has turned into a 'fewer, but bigger' industry. That polarization is playing out across the lifecycle, starting with an unprecedented number of startups collecting $100m+ in a single round of funding all the way through to a record number of big-ticket exits.

Whether it's the 'SoftBank effect' or simply more late-stage investors, the net result is that VCs are writing bigger checks. Trade group National Venture Capital Association reported that there were 199 companies that raised $100m or more in a single round in 2018. That was nearly twice as many as the previous year. In many cases, the private funding effectively replaces the proceeds that a startup would pocket through an IPO. (We look at the tech IPO market at the end of this report.)

As VCs concentrate more of their resources into fewer startups, exits for the startups have, likewise, followed suit. The M&A KnowledgeBase tallied the sale of just 603 startups in 2018, the second-fewest exits in the past half-decade. Proceeds from those deals, however, smashed all records. Last year's total of $83bn in announced or estimated deal value almost eclipsed the total for the three previous years combined.

Underscoring the fewer, but bigger trend, we would note that four of the five largest-ever sales of VC-backed startups in the M&A KnowledgeBase, which goes back to 2002, are 2018 prints. Even beneath last year's blockbusters such as Walmart-Flipkart and Microsoft-GitHub, an unprecedented number of startups got taken out at prices that started with a 'b' rather than just the prosaic 'million.' Duo Security, Glassdoor and Cylance all enjoyed unicorn-sized exits in 2018. Altogether, fully a dozen startups that had drawn in venture money sold for more than $1bn in 2018, triple the average number each year since the start of the current decade.

More broadly across the venture ecosystem, there was a general lift in the exit valuations that startups secured in 2018. On a median basis, startups sold for 5.8x trailing sales last year, almost one-third richer than the 4.5x multiple recorded in the M&A KnowledgeBase since the start of the decade. Startups selling applications and infrastructure software, as well as those targeting infosec, all enjoyed the healthiest multiples, according to the data. According to our understanding, Heptio, Phantom Cyber, RedLock and GitHub all sold for over 20x trailing sales.

Turning to the volume of VC exits, there were several factors that kept the number of deals below their recent average. Obviously, with exit valuations for venture portfolio companies running at a multiyear high in 2018, many buyers were simply priced out of the market. But it wasn't just the size of the checks, it was also who's writing them for startups. These changes will have implications far beyond Sand Hill Road.

As one example, consider this: In 2018, the M&A KnowledgeBase shows that, statistically speaking, a VC-backed startup was more likely to sell to a PE buyer than a fellow VC-backed vendor. That's the first time financial acquirers have added more startups to their portfolios, a stunning reversal from when 'inter-species deals' were the norm. In 2015, for instance, the M&A KnowledgeBase shows almost three times as many VC-to-VC transactions as VC-to-PE transactions.

Put simply, VCs aren't buying what other VCs are selling. In 2018, venture-backed startups announced the fewest purchases of fellow venture-backed startups since the recession, according to the M&A KnowledgeBase. And yet, when it comes to resources available to do deals right now, most startups have never held more cash or had larger, more mature businesses. Organic growth, rather than inorganic expansion, has become the primary startup strategy. Marketing, rather than merging.

That disconnect stands out most clearly at high-profile startups. For instance, since its founding a decade ago, Airbnb has announced 17 acquisitions. However, only one of those printed in 2018. That inactivity comes despite raising $1.5bn in debt and equity over the previous two years. For comparison, Dropbox purchased at least four companies each year from 2012-15, a span during which it raised $850m in debt and equity. Elsewhere, Uber did only one acquisition last year, which was actually through its recently created Uber Eats subsidiary, while Palantir Technologies hasn't been in the M&A market since 2016.

Meanwhile, PE firms have started reaching into VC portfolios much more frequently and aggressively. The M&A KnowledgeBase shows that buyout firms, which once operated on the diametrically opposite end of the corporate lifecycle from VCs, are now providing almost one out of four venture exits. They are doing this by bolting on startups' assets to their ever-increasing number of existing portfolio companies, as well as by recapping a startup, or buying out an existing syndicate of venture investors.

Altogether, PE firms have doubled the number of VC-backed deals over the past three years. That buying group has increased its startup purchases every single year since 2015, while the number of VC-to-VC transactions has fallen every single year during that period. Increasingly, startups are going to companies owned by Silver Lake rather than Greylock, or KKR rather than NEA. The M&A KnowledgeBase indicates that PE firms accounted for a record 23% of VC exits in 2018, up from roughly 10% at the start of the current decade.

Amid the changes on the demand side of the M&A equation for VC-backed startups, the amount of supply (i.e., VC portfolio companies for sale) appears likely to increase in 2019 and beyond. The reason? Venture dollars are expected to be harder to find.

Nearly four out of 10 respondents (38%) to the 451 Research Tech Banking Outlook Survey said venture funding is likely to dry up in the coming year, more than three times the 11% that forecast more freely flowing funds. The most-recent forecast represents a deterioration in the VC climate from the previous survey, when 33% predicted pinched access to capital but 18% saw it flowing more freely.

If cash-burning startups do struggle to raise life-sustaining capital, they may well opt instead to sell. That could bump up the number of VC-backed sales, especially for 'soft landings,' where a buyer might pick up a startups' engineers and IP, but not necessarily the full company. That potential disruption (for instance, a pivot that goes nowhere) is one of the reasons why startups often struggle to land customers. In a 451 Research VotE survey of 1,000 IT buyers and users, four out of 10 (39%) said their company has reservations about buying from emerging tech vendors.

Turning to the other exit, 2018 saw a record number of enterprise-focused tech IPOs, with nearly twice the number of offerings from just three years ago. By our count, 15 business-to-business startups went public on the major US exchanges last year. (To be clear, this total excludes consumer technology and the surprisingly large number of biotech offerings, as well as those business-focused technology vendors that listed at exchanges other than the Nasdaq and NYSE.) Last year marked the third straight annual increase in the number of tech IPOs we have tallied.

Yet 2018 was extremely front-end-loaded. Twice as many enterprise-focused tech vendors came public in the first half of last year (10 IPOs) than the second half (five IPOs). Not a single tech company made it public in the final two and a half months of 2018. The barren stretch at the close of 2018 was quite a drop-off from the start of the year, when nearly two B2B tech startups were coming public each month.

Of course, the IPO activity late last year was hit hard by the fact that the broader US stock market was also hit hard. The US equity indexes all recorded mid-single-digit percentage declines in 2018, their worst performance since 2008. The dip into the red, which played out sharply and swiftly in the final three months of the year, left many investors rattled. They were used to stock prices only going up. In that regard, even a relatively mild 4% decline in the Nasdaq in 2018 could have felt like a vicious bear market to investors who had seen the index average 20% annual returns over the previous half-decade.

A similarly optimistic moneymaking outlook in the IPO market held through the summer. Virtually every one of the first dozen or so of last year's debutants priced either in-range or above and then traded higher in the aftermarket. Risk-insensitive investors lavished astoundingly rich valuations on the most-speculative part of the equity market – untested startups with cash-burning business models. Zscaler, Smartsheet and Pluralsight all benefited from this buoyancy, surging to more than 20x trailing sales in mid-2018 trading.

When the broader equity market started plunging in early October, the IPO market got pulled down as well. Carbon Black barely held its unicorn status at the end of 2018, even after enjoying a peak valuation of twice that level. Shares of high-profile debutant Dropbox spent the first few months on the Nasdaq valued solidly above $12bn. The enterprise software provider exited the year at a $9bn valuation. Similarly, DocuSign, which came public in April, closed out 2018 down over one-third from its peak.

Those near-daily discounts on the already public tech companies late last year undoubtedly weighed on decisions by other tech vendors about whether to pursue their own offering. Potential IPO candidates suddenly had to plan around a potential bear market for the first time since the recession ended. The abrupt deterioration in sentiment came through clearly in a survey by 451 Research's Voice of the Connected User Landscape done during some of the volatile days in October. Three times as many investors told us they had lost confidence in the equity market since last summer as had gained confidence in it. When Wall Street feels like shaky ground, it's hard for new offerings to find their footing.

None of that precludes new offerings in the coming year. (Although a federal shutdown, which has effectively closed the SEC, does do that.) Potential paperwork problems notwithstanding, several 'decacorns' – including Lyft, Uber and Palantir – are all thought to be moving toward an IPO in 2019. We would note, however, that big names tend to be 'bankable' regardless of what's happening in the broader market. So as welcome as those new listings would be, they probably won't provide much lift for the broader tech IPO market. No one holds out these so-called decacorns as representative IPO candidates.

It's the companies beneath those high-fliers – the ones that don't necessarily measure their revenue or valuations in the billions of dollars – that are likely to suffer from the market turmoil. If that's the way 2019 plays out on Wall Street, then the IPO market is also likely to be characterized by the fewer, but bigger trend that's also shaping M&A exits for startups.

That showed up in the rather muted forecast for IPO activity in December's 451 Research Tech Corporate Development Outlook. Respondents predicted just 21 public offerings by tech startups in 2019, which was slightly below the average forecast in recent years. In other word, the respondents – 70% of whom work at companies that have already come public – don't see their ranks being substantially increased in 2019.