The 2023 IPO Market Is Looking Grim
There were a record number of IPOs in 2021, largely because of an optimistic stock market and rock-bottom interest rates. In 2021, companies listing in the U.S. made $155 billion in proceeds from IPOs, according to a report from Ernst & Young. But the number of companies going public slowed sharply this year as the market turned volatile and the Federal Reserve hiked interest rates to tame decades-high inflation. In the first half of 2022, proceeds from IPOs totaled just $4.8 billion.
An investing environment marked by high interest rates and a shaky stock market is not exactly conducive to risk taking, and that's what investors are facing. The IPO market tends to be more active during times of economic growth and optimism, when investors are more willing to take on risk and companies are more likely to pursue IPOs to raise capital, notes Andrew Lokenauth, financial market research analyst, and professor of finance at the University of San Francisco School of Management. In contrast, during times of economic uncertainty or downturn, the IPO market may be more sluggish, as investors are more cautious and companies are less likely to go public.
So unless the market picks up, investment firms will pick fewer companies to capitalize, and venture capitalists and private equity fund managers will continue to restructure portfolio companies with the focus on profitability -- one of the key factors behind the wave of layoffs across the tech sector, notes Tom Taulli, author of High-Profit IPO Strategies: Finding Breakout IPOs for Investors and Traders.
There are still many privately held tech unicorn companies with strong prospects. Though it may take these companies some time to acclimate to the lower valuations before they are willing to enter the capital markets again, particularly because many of them raised substantial amounts of capital last year. If these companies do go public, it likely won't be until the second half of 2023.
"Those aiming for IPOs may get their ducks in a row in 2023, but have their eyes set for a longer time horizon for pulling the trigger on an IPO," says Chenxi Wang, founder and managing general partner of San Francisco-based venture firm Rain Capital. Other exit strategies, she adds, such as strategic mergers and acquisitions, will likely still be in play.
Many companies that forecasted to IPO this year have delayed until at least 2023. For example, car-sharing company Turo, which filed for an IPO in January 2022, is still idling. Other companies including Stripe, Klarna, Plaid, Discord, and Arm have hinted at IPOs but have yet to do so. Some, like Stripe, have employee stock options that are nearing the 10-year expiration; there's more pressure on them to IPO to give their employees some liquidity, says, Dan Siciliano, CEO and co-founder of Phoenix-based financial services company Nikkl and a former professor at Stanford Law School.
Going public via a special purpose acquisition company (SPAC), once a red-hot ticket, has lost its appeal. Wang notes that most investors still see them as risky, unpredictable, and lacking accountability. But they won't disappear. "There should still be a place for SPACs," she says, "but that level of SPAC feverishness in 2020 was nearly on the verge of insanity, which we don't expect to see going forward."