Following a record-breaking tech IPO year in 2021 that included the debuts of electric carmaker Rivian; restaurant software company, toast; Cloud software providers, GitLab and HashiCorp, and stock trading app Robinhood, 2022 was a complete dud.
According to CNBC, the only notable technology offering in the US this year was Intel’s spin-off from Mobileye, a 23-year-old company that makes technology for self-driving cars and was publicly traded until its acquisition in 2017. Mobileye raised close to $1 billion, and no other U.S. tech IPO raised even $100 million, according to FactSet.
In 2021, on the other hand, there were at least 10 tech IPOs in the US that raised $1 billion or more, and that doesn’t factor in the direct listings of Roblox, Coinbase, and Squarespace, which were so well capitalized they weren’t cash have to bring from outside.
The narrative turned completely on its head as the calendar turned, as investors shed the risk and promise of future growth in favor of profitable companies with balance sheets believed to be strong enough to weather an economic downturn and persistently higher interest rates. Pre-IPO companies changed plans after seeing their public market peers plunge 50 percent, 60 percent and in some cases more than 90 percent from last year’s highs.
Overall, proceeds from IPO deals fell 94 percent in 2022 — from $155.8 billion to $8.6 billion — according to Ernst & Young’s IPO report released in mid-December. At the time of the report’s publication, the fourth quarter was on track to be the weakest of the year.
As the Nasdaq Composite heads for its steepest annual drop since 2008 and underperformed the S&P 500 for the first consecutive years since 2006-2007, tech investors are looking for signs of a bottom.
But David Trainer, CEO of equity research firm New Constructs, says investors need to first get a grip on reality and evaluate resurgent tech companies based on fundamentals, not far-fetched promises.
As tech IPOs flew in 2020 and 2021, Trainer waved the warning flag and released detailed reports on software, e-commerce and tech-related companies that brought their sky-high private market valuations to the public markets. Trainer’s calls seemed comically bearish as the market rallied, but many of his picks look prescient today, with Robinhood, Rivian, and Sweetgreen each at least 85 percent off their highs over the last year.
“Until we see a sustained return to intelligent capital allocation as the primary driver of investment decisions, I think the IPO market will struggle,” Trainer said in an email. “Once investors get their focus back on fundamentals, I think markets can get back to doing what they’re supposed to do: help allocate capital intelligently.”
Lynn Martin, president of the New York Stock Exchange, told CNBC’s Squawk on the Street last week that she was “optimistic about 2023” because the “backlog has never been this big” and that activity will pick up once the to dissipate volatility in the market.
For companies in the pipeline, the problem isn’t as simple as weathering a bear market and volatility. They also need to acknowledge that the ratings they have received from retail investors do not reflect changing public market sentiment.
Companies that have been funded in recent years have done so at the end of an extended bull market, during which interest rates have been at historic lows and technology has fueled major changes in the economy. Facebook’s mega IPO in 2012 and millionaires shaped by Uber, Airbnb, Twilio and Snowflake recycled money back into the tech ecosystem.
Venture capital firms, meanwhile, were raising increasing amounts of funds and competing with a new breed of hedge funds and private equity firms that were pumping so much money into technology that many companies chose to remain private longer than they otherwise would.
In 2021, VC firms raised $131 billion, surpassing $100 billion for the first time and surpassing $80 billion for the second year in a row, according to the National Venture Capital Association. The average post-money valuation for VC deals at all stages increased to $360 million in 2021 from about $200 million last year, the NVCA said.
Those valuations are in the rearview mirror, and any company that raised money during this period must face reality before going public.
Some high-profile late-stage startups have already taken their nuggets, though they may not be dramatic enough.
Stripe cut its internal valuation by 28 percent in July from $95 billion to $74 billion, the Wall Street Journal reported, citing people familiar with the matter. According to the Financial Times, Checkout.com cut its valuation from $40 billion to $11 billion this month. Instacart has taken several hits, dropping its valuation from $39 billion to $24 billion in May, then to $15 billion in July, and finally to $10 billion this week, according to The Information.
Klarna, a provider of buy-now-pay-later technology, suffered perhaps the sharpest drop in value among the big-name startups. The Stockholm-based company raised funding this year at a valuation of $6.7 billion, a discount of 85 percent from its previous valuation of $46 billion.
“There was a hangover from all that binge drinking in 2021,” said Don Butler, managing director of Thomvest Ventures.
Butler doesn’t expect the IPO market to improve significantly in 2023. The Federal Reserve’s continued rate hikes are more likely to push the economy into recession, and there are no signs yet that investors are ready to take risks.
“What I’m seeing is that companies are looking at weaker B-to-B demand and consumer demand,” Butler said. “That will also make for a difficult 23.”
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