Morgan Stanley fintech bankers: Who can IPO in this market?

Why they matter: Morgan Stanley has consistently sat among the top IPO underwriters.

This conversation has been edited for clarity.

What kind of fintech company do you think could potentially seek to go public successfully?

• Patel: We've done a lot of data and analytics going back to the dotcom crash and looked at software companies as a proxy for fintech companies.
• The data tells you that for tech companies, investors are going to want a company that has, call it, $200 million or $250 million plus of actual revenue — not annual revenue run rate. Compare that to during COVID, when you had companies that were sub-$100 million ARR going public.

Does the company need to be profitable?

• Patel: We did a survey among a bunch of institutional investors and asked what matters more: growth or profitability?
• The answer — guess what — is both. The data said that they're OK with a company with slightly positive to negative 10% operating margin, but [which] is growing 30% to 40% on revenue. What they don't want is a company that's negative 50% margin growing at 300%. So the company needs to meet the rule of 40; people want to know this is a business that can hit profitability in a predictable time frame.
• The last criterion, according to the survey, is business model. Investors are asking if it's a sustainable model that you can turn into a platform with multiple revenue line items.
• We have this saying that a lot of these fintech companies were features, not platforms. Now they're trying to figure out how to become platforms and companies, and not many of them will may be able to make that pivot.

On that point of sustainability — do you think the public markets will also favor a B2B fintech over a consumer-facing one?

• Gerson: Many B2B companies don't have as much scale as some of the consumer companies. But there is a ton of growth there, and it does hit on all those points that Jigar was laying out earlier as to what makes a good IPO candidate. So I think B2B could be a great place place for an IPO candidate to reopen the IPO market with volume.

Will the first one to go public have to have a big brand name?

• Patel: I would say yes. It has to be a must-own.

I'll ask the impossible question: What's your best guess on when are we going to see the big tech IPO that reopens the market?

• Patel: I'm an optimist — so I'm bullish that you probably see something this year. If somebody had said at the beginning of this year you're going to have a new $1 trillion market cap company, everyone would've said no. Now there's Nvidia.
• Gerson: I think it's going to be highly dependent on what happens in the economy. So many fintechs are monetizing consumer spend, so if there's a slowdown, that has an impact. Enterprise and B2B are a little bit more insulated but would still be impacted by the macro environment.

With the two SEC lawsuits against Binance and Coinbase alleging that various cryptocurrencies are securities, do you think a crypto company could debut in this environment?

• Patel: I wouldn't hold my breath. You're fighting two things. One: You have to fight to get your prospectus deemed effective by the SEC. Two: You're facing a market that is very skeptical of crypto companies.

Editor's note: This piece has been corrected to show that Jigar Patel was referencing annual revenue run rate (not annual recurring revenue).