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Another year, another lousy IPO market. The 2023 IPO market is closing with a whimper, not a bang. So far, 106 IPOs have raised $19.4 billion in 2023, according to Renaissance Capital. That’s following on 2022, when a measly $7.7 billion was raised, the worst year for IPOs in decades. By contrast, a normal year should see at least $50 billion raised. With the S & P 500 up nearly 20% this year, you would think there would be a flurry of IPO activity into the close of the year. Nada. There have been no significant IPO launches since Birkenstock went public October 10th. What’s the excuse this year? You’d think the IPO market would be bubbling, but it’s dead quiet. You can’t blame the holidays: plenty of companies have gone public around Thanksgiving and Christmas just in the last few years. November-December IPOs Rivian Nov. 2021 $12 b. Hertz Nov. 2021 $1.3 b. Braze Nov. 2021 $500 m. Sweetgreen Nov. 2021 $364 m. Allbirds Nov. 2021 $303 m. Airbnb Dec. 2020 $3.5 b. Doordash Dec. 2020 $3.4 b. Sotera Health Nov. 2020 $1.1 b. Miravai Life Sciences Nov. 2020 $1.6 b. Source: Renaissance Capital For a good part of the year, the excuse was interest rates were rising, the market was too volatile, and the after market performance of 2023 IPOs was terrible. But these factors have reversed in the past six weeks. The stock market is rallying. Interest rates are declining. And the after-market performance of IPOs this year has greatly improved since the end of October. Largest IPOs in 2023 (from offering price) ARM: + 20% Kenvue: – 12% Birkenstock: + 1.9% Instacart: – 22% Klaviyo: + 1.4% Cava: + 64% Indeed, the Renaisance Capital IPO ETF ( IPO ), a basket of roughly 60 large IPOs in the past two years, is up 40% this year, twice the performance of the S & P 500. The November rally is too little too late to save the IPO market Unfortunately, it all came a little too late to rescue 2023. “An IPO can be a major distraction for management, requiring intense focus for the two-week roadshow, so it’s not as easy as flipping a switch once markets start to cooperate,” Matt Kennedy from Renaissance Capital told me, noting that many potential candidates had already decided that the market was too volatile back in November. Don Short, head of venture equity at InvestX, agrees: “The main issue is that there are no companies with a compelling story and all their ducks in a row ready to IPO on short notice,” he told me. “After the relatively poor performance of the September IPOs (Instacart, Klaviyo, Birckenstock, Arm), I know a number of companies that were preparing and entering quiet periods put things on hold … I don’t think the existing IPO candidates have the confidence in their growth outlook to be first out of the gate and pull that off in a December market.” Stop me if you’ve heard this before: “Next year will be better.” There’s no shortage of companies that are potential IPO candidates in 2024. Some, like social forum network Reddit, payments firm Stripe and auto rental marketplace provider Turo have been floating around so long they are practically IPO Grandfathers. Same with ServiceTitan, which provides software for residential and commercial heating, ventilation and air conditioning (HVAC) and other field service businesses. They confidentially filed to go public in 2022 and still haven’t pulled the trigger. Others are of a more recent vintage. Panera Bread confidentially filed to go public recently, as did Chinese fast fashion retailer Shein. Buy now / pay later service provider Klarna is also considered a potential IPO candidate. Healthcare payment firm Waystar was set to go public in November but delayed its IPO and will reportedly wait until 2024. The AI craze may boost some companies like Databricks, who could jump in if the market improves. Rubrik, a cloud data managerment and enterprise platform backed by Microsoft, was also an IPO candidate in late 2023. Some smaller companies with public brand recognition (canned water company Liquid Death) could also dive in, as could Kim Kardashian’s shapewear brand, Skims. A few potential candidates are very exciting to contemplate but may not be ready or interested in going public. SpaceX’s Starlink satellite business has been discussed as a potential IPO candidate, but Musk denies it. Another, Bytedance, would be huge but has obvious political complications — it’s a Chinese tech company that develops video-sharing social networking apps. Still, there’s plenty of reason to think there will not necessarily be a rush of candidates next year. The valuation haircuts are a killer The first is the valuation problem. Most IPO candidates are unicorns: small tech or biotech companies with valuations of $1 billion or above, and they have faced a serious down round in funding or valuation in 2023. “Many companies are losing their unicorn status in the private market,” Howe Ng from Forge Global told me. Bloomberg recently reported that out of 128 tech unicorns (those with valuations above $1 billion), nearly 90% were estimated to be valued lower in private trades. Citing Forge Global, they noted that about a third had valuations that had dropped below $1 billion, meaning they are no longer even considered unicorns. “I think we are still seeing valuations being reset,” Ng told me. Kyle Stanford from Pitchbook agreed, noting that many unicorns “are sitting with valuations generated on very high revenue multiples, and that is something that won’t be supported in the current market,” noting that Instacart had to take a 75% valuation cut. “Even if revenues have continued growing, public investors may be placing a value on revenues that is much lower, creating a down-valuation IPO,” he told me. “This leads to increased dilution for existing investors, executives, and employees.” The bottom line on valuations: there are a lot of former tech unicorns that are now worth a lot less than they were, and certainly worth a lot less than any capital raise they undertook in the last three years. For many, it’s still easier to stay private Another reason arguing against an imminent IPO boom: it’s still easier to stay private for many companies. James Ulan, also from Pitchbook, noted that he has seen recent capital raises to pay for early employee stock tax liabilities, and that the growth of the secondary private market means employees have an outlet to sell their shares even without going public: the “robust secondary markets allow employees to sell shares (many employee secondary trades in Stripe, SpaceX, Databricks, etc.) [and is] reducing pressure on management to IPO,” he told me. “And VCs are selling their late-stage stakes to secondary funds and other VCs.” A final argument against a winter 2024 tech boom: the stock market is not as strong as it looks. While investors tend to use the S & P 500 as a gauge of the market, that is a large-cap index that itself has been dominated by a few large-cap tech stocks. Many IPO watchers say that the performance of small- and midcap stocks is a more appropriate benchmark for IPOs and, if considered through this lens, the performance of the market is much less compelling: 2023 stock market performance by size S & P 500: + 9% S & P Mid Cap: + 4% S & P Small Cap: +7% “Many companies that are looking at their initial public offering aren’t going to be benchmarked on how Microsoft of Nvidia have done this year, they will be benchmarked on the similar companies by industry and size,” Stanford from Pitchbook told me. The bottom line: it’s still a long slog to a robust IPO market, and we are going to have to see continuing lower rates, a bounce in the small and midcap markets and some decent performance from smaller and midsized IPOs before we get really big companies coming back in. “If we see positive performance from these IPOs and market conditions for equities remains stable, we could see a big IPO, like Databricks or Stripe later in the year,” Greg Martin from Rainmaker Securities told me. “But they will wait until market conditions are pristine.”
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