These weeks leading up to Thanksgiving typically witness a flurry of substantial Initial Public Offerings (IPOs) aiming to enter the market before the holiday season commences. However, contrary to expectations, the IPO landscape is eerily quiet.
Don Short, the head of venture equity at InvestX, has pointed out that any IPO activity anticipated before the year’s end should be unfolding at this very moment. Surprisingly, nothing substantial is materializing.
According to Matt Kennedy from Renaissance Capital, the current standstill is a result of a dichotomy: “The bad companies can’t go public, and the good companies don’t want to go public in a bad market.”
Several factors contribute to this lull in IPO activities. A dismal performance of stocks in October, sustained higher interest rates, lackluster after-market showings from recent IPOs, and the possibility of significantly lower valuations have led many potential IPO candidates to reconsider or postpone their market entry.
The consistent upward trajectory of the 10-year Treasury yield has notably dampened spirits in the IPO market. Greg Martin from Rainmaker Securities described this trend as a “big wet blanket” for the market’s dynamics.
Companies Hit the Brakes on IPO Plans
Notable entities, including Waystar and Panera Bread, have put their IPO plans on hold. Waystar is reportedly delaying its IPO until December or even extending it into 2024. Panera Bread, amidst laying off 17% of its corporate staff, is reconsidering its move toward an IPO in the upcoming year.
Other potential IPO candidates might have to face significant valuation adjustments. Klarna, a “buy now, pay later” firm, has no immediate intentions to go public, having recently experienced a substantial 85% reduction in its valuation to $6.7 billion from nearly $46 billion.
Similarly, Shein, the Chinese fast-fashion giant, remains uncertain about its IPO’s timing and valuation. Sources close to the company suggest a targeted valuation of $80 billion to $90 billion, while its most recent funding round in May pegged its value at $66 billion.
Divergence from Previous Years
Contrary to the norm, where major IPOs typically went public in November and December, the expected year-end rush has been elusive. In 2022, the IPO gold rush dwindled, and it seems to be repeating the same trend this year.
The year 2023, so far, has seen 96 IPOs raising $18.8 billion. This is a marked improvement from the paltry $7.7 billion raised in 2022, which marked the worst year for IPOs in decades. In a standard year, at least $50 billion is anticipated to be raised.
Challenges from Recent IPOs
The recent string of IPOs hasn’t fared well either, creating a further dampening effect on potential market entrants. Several major IPOs are trading below their offering prices. Notably, Arm, Kenvue, and Birkenstock are down 13%, 8%, and about flat from their offering prices, respectively.
Klaviyo, a marketing automation company that went public in September, is also trading 8% below its offering price of $30 following an earnings report.
Cava Group, a restaurant chain that went public in June, is currently trading above its initial offering price of $22 at $31. However, it has faced volatility, reaching $57 in the month after going public, resulting in significant losses for early buyers.
Potential Future Scenarios for IPOs
Although the market appears to be on a hiatus, some hope remains. There’s a possibility of increased activity in December if the current market rally continues.
Some smaller firms, like U.S. natural gas producer BKV and homebuilder Smith Douglas, have updated their prospectuses, indicating their intent to go public.
However, some older IPO candidates like Reddit or Stripe face a predicament. The market’s focus on AI leaves other sectors less appealing for public offerings. Arm stands out as one of the few that hasn’t experienced a significant downturn, attributed to its association with AI and the perceived halo effect in this domain.
Tough Choices Ahead
For IPO candidates, the current scenario presents challenging choices: a probable IPO with reduced valuations, remaining private with similar valuation cuts and reliance on venture capital, or seeking mergers or potentially facing closure.
Greg Martin observes that the companies in the best position are those capable of funding their operations from their own cash flow. Unfortunately, this is a limited group. The private financing markets are experiencing difficulties, leading to lower prices for private stock sales compared to previous years.
This precarious situation leaves a considerable number of tech unicorns, those with valuations above $1 billion, in a delicate spot. Martin notes a growing trend of unicorns struggling due to negative cash flow, potentially leading to increased mergers or acquisitions.
The road to an IPO appears foggy at present, with market uncertainties influencing the decisions of potential IPO candidates. However, the market’s dynamics can shift swiftly, and opportunities may arise if the current rally continues, reviving the enthusiasm for market entries.
The IPO market remains subdued due to various market challenges. However, despite the current lull, there’s a glimmer of hope that a market turnaround or further rally might spark renewed interest and activity. The situation remains fluid, and companies are cautiously navigating through a landscape dominated by uncertainties, valuations, and market expectations.
Dear Readers, share your thoughts or predictions on the future of the IPO market.