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Carl Joseph Hildenbrand | AFP | Getty Images
Car-sharing service Turo introduced her Subscription prospectus In January 2022. A month ago, Reddit said it filed a Registration draft for public subscription. It was Instacart’s confidential papers foot In May last year.
None of them have hit the market yet.
Although a swollen pipeline From companies waiting to go public and a resurgence in technology stocks that propelled the Nasdaq up 30% in the first half of 2023, the IPO drought continues. There hasn’t been a notable technology IPO backed by a company in the US since December 2021, when the software vendor HashiCorp for the first time on Nasdaq.
Across all industries, just 10 companies raised $100 million or more in US initial stock sales in the first six months of the year, according to FactSet. During the same period in 2021, there were 517 such deals, highlighted by $1 billion-plus IPOs from companies including dating sites. stutterOnline lender Confirmsand software developers UiPath And The guard is one.
As the second half of 2023 begins, investors and bankers don’t expect much champagne to appear for the rest of the year.
Many once high-flying companies are still clinging to their old valuations, failing to come to terms with a new reality after a brutal 2022. In addition, weak economic growth has caused companies and consumers to cut costs and delay purchasing software, making it especially difficult for companies to comfortably forecast the next two quarters. Wall Street loves predictability.
So if you’ve been waiting for a great debut from design software maker Canva, the ticket site StubHub Databricks or data management company, be patient.
“There’s a disconnect between valuations in 2021 and valuations today, and that’s hard to swallow,” said Liz Baer, founder of Class V Group IPO advisory in Portola Valley, California. “There will be additional activity after a period of absolute radio silence, but it’s not like companies are racing out the door.”
Public markets tell a mixed story. This year’s rally has put the Nasdaq within 15% of its record from late 2021, while the cloud stock index is still down nearly 50%.
Some signs of optimism emerged this month as a Mediterranean restaurant chain reward It was offered for public subscription on the New York Stock Exchange. The stock more than doubled in its first trading day, indicating high demand from retail investors. The buyer indicated that institutions were also enthusiastic about the deal.
Last Friday, Israeli beauty and technology company Oddity, which operates the Il Makiage and Spoiled Child brands, filed to go public on Nasdaq.
This all comes after a big month for spin-offs. According to data from Goldman Sachs, May was the busiest month for public stock sales since November 2021, driven by a jump in follow-up deals.
Outperform Apple and Nvidia
While investors crave new names, they are more discerning when it comes to technology than they were at the end of a decade-long bull market.
Big stocks apple And nvidia We’ve seen huge gains this year and they’re back trading near all-time highs, which boosted the Nasdaq due to the heavy weightings in the index. But developments are not spread evenly across the industry.
In particular, investors who bet on less mature companies are still getting hurt. The companies that held the seven largest US tech IPOs in 2021 have lost at least 40% of their value since their inception. Coinbasewhich went public through direct listing, fell by more than 80%.
That year’s IPO class featured high-growth companies with higher cash burn, a formula that worked well until recession fears and rising interest rates led investors to assets better positioned to withstand the economic downturn and rising costs of capital.
Employees of Coinbase Global Inc, the largest cryptocurrency exchange in the United States, watch as they present their listing on the Nasdaq MarketSite jumbotron in Times Square in New York, April 14, 2021.
Shannon Stapleton | Reuters
Optimism is picking up, bankers and investors tell CNBC, but lingering economic worries and a valuation burden from the pre-2022 era have paved the way for a quiet second half for tech IPOs.
One added challenge is that fixed income alternatives are back. After a long period of near zero interest rates, this year the Fed raised its target interest rate to between 5% and 5.25%. Parking money in short-term safes, certificates of deposit, and high-yield savings offerings can now generate annual returns of 5% or more.
“Interest rates are not only about the cost of financing, but also about getting investors a risk-free 5% return,” said Jake Dollarhyde, CEO of Longbow Asset Management. “You can earn 15%-20% in the stock market but lose 15%-20%.”
Dollarhide, whose company has invested in high-profile tech offerings like Google And FacebookHe says IPOs are important. It provides more opportunities for money managers, and generates profits for the technology ecosystem that helps fund the next generation of innovative companies.
But he understands why there are doubts about reopening the window. Perhaps the biggest crash in technology investment has followed the boom in special-purpose acquisition companies (SPACs), which have brought dozens of less mature companies into the public market through reverse mergers.
Names like Open doorAnd Alfalfa healthAnd 23andMe And metal desktop They have lost more than 80% of their value since entering the market via SPAC.
“The stench of failure from the 2021 plumber’s madness seems to have soured the appetite of investors looking for IPOs,” Dollarhyde said. “I think this has caused some damage to the traditional IPO market.”
Private markets felt the impact. Funding for investment projects has slowed dramatically in the past year from record levels and has remained relatively subdued, outside of the AI hot spot. Companies have had to cut staff and close offices in order to conserve cash and turnover
Pre-IPO companies like Stripe, Canva, and Klarna have received massive hits in their valuations, either through internal actions or writedowns from outside investors.
waiting game
Few have been hit as hard as Instacart, which has been hit so frequently It lowered its valuation, from a peak of $39 billion to as high as $10 billion in late 2022. Last year, the company secretly registered to go public, but it has not yet filed publicly and has no immediate plans to do so.
Similarly, Reddit said in December 2021 that it had secretly submitted a draft registration manifesto for public release. That was before the online ad market plummeted, as Facebook suffered three consecutive quarters of declining revenue and Google’s ad sales also slumped.
Now Reddit is in the midst of a business model shift to focus less on ads and more on revenue from third-party developers for using its data. But the change sparked outcry this month across a wide range of Reddit’s most popular communities, leaving the company with a lot to sort out before it can sell itself to the public.
A Reddit spokesperson declined to comment.
Turo was so close to the IPO that it bypassed the confidential filing and published the full S-1 registration statement in January 2022. When the shares sold, the offering was indefinitely delayed. To avoid withdrawing its filing, the company is required to continue to update its quarterly results.
Like Instacart, Turo operates in the sharing economy, which was a dark spot for investors last year. AirbnbAnd Uber And DoorDash They all return in 2023, but they also forced massive job cuts. Turo went in the opposite direction, doubling the number of full-time employees to 868 at the end of March from 429 at the time of its 2021 IPO filing, according to its report. latest files. company It said It laid off about 30% of its employees in 2020, during the covid pandemic.
Turo and Instacart could still go public by the end of the year if market conditions continue to improve, according to sources familiar with the companies, who asked not to be named because they are not authorized to speak publicly on the matter.
Byron Dieter, a cloud software investor at Bessemer Venture Partners, doesn’t expect any notable activity this year, and says the next batch of companies to debut will likely wait until after the first-quarter results are presented in 2024.
“Companies that were on file or were considering an exit a little over a year ago have pulled out, stopped updating, and have no plans to reformulate this calendar year,” said Dieter, whose investments include. twilio and HashiCorp. “We have 10 months of real activity picking up,” Dieter said, adding that uncertainty about next year’s presidential election could lead to further delays.
In the absence of IPOs, startups have to consider the fate of their employees, many of whom have a significant amount of their net worth tied up in their company’s stock, and have been waiting years for the chance to sell some of it.
tape Address the issue In March, he announced that investors would buy $6.5 billion worth of employee stock. The move lowered the payments company’s valuation to about $50 billion from $95 billion. Dieter said many late-stage companies are looking into similar transactions, which usually involve allowing employees to sell about 20% of their vested shares.
He said his inbox is filled daily with brokers trying to “collect little pools of stock” from employees at late-stage startups.
“The Stripe problem is real, and the general liquidity problem is real,” Dieter said. “Employees are scrambling to find some way to cash. With the general market still closed, they are asking for alternatives.”
G Squared is an investment company active in employee equity purchases. About 60% of G Squared’s capital goes into secondary purchases, which helps companies provide a certain level of liquidity to employees, said Larry Achebrook, founder of the company.
Aschebrook said in an interview that deals began to pick up in the second quarter of last year and have continued to increase to the point where “it’s now overwhelming.” He said companies and their employees are becoming more pragmatic about resetting the market, so large chunks of stock can now be bought for 50% to 70% less than the valuations of the 2021 funding rounds.
Because of non-disclosure agreements, Aschebrook said he can’t name any private company shares he’s bought recently, but said his company previously bought minor shares before the IPO. pinterestAnd CourseraAnd Spotify And Airbnb.
“Right now, that release from pressure is sorely needed,” Achebrook said. “We help companies extend their private lifecycle and solve problems that arise by staying private longer.”
He watches: The private market index is trading higher for the first time in two years
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