IPOs Were Crushed This Year — And Venture Capitalists Are Worried

Since 2021, initial public offerings have been a rollercoaster, with market volatility shaking the foundations of the traditional IPO landscape. 

Numerous companies debuted on the U.S. stock market with valuations over $10 billion in 2021, only to see their worth collectively dive by 63%, highlighting the market's pronounced volatility, Datatrek reports.

This turbulence has impacted the companies seeking to debut on the stock market and sent ripples of concern through the venture capitalist community, Datatrek suggests.

In a rather tumultuous climate, only a few companies are trading above their initial offering prices among the top 20 public market introductions for venture-backed U.S. entities established in the past 15 years, reported Crunchbase. 

Companies like Airbnb Inc. ABNB, Pinterest, Inc. PINS, and Snowflake Inc. SNOW have yet to reclaim the soaring valuations they witnessed in their stocks' initial closing sessions.

In 2023, this trend, combined with the underwhelming market performance of entities like Maplebear Inc. CART, better known as Instacart, and Klaviyo, Inc. KVYO after their recent public listing has venture capitalists exercising caution.

The recent IPO journeys of tech giants Instacart and Arm Holdings Plc ARM have somewhat dampened the enthusiasm for forthcoming tech listings. 

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Instacart, having gone public on Sept. 19, encountered a drop in stock price by month's end, even after initially spiking 40%. 

Voices from the Valley

Many startups delayed their IPO plans after the market turned sour in 2021, according to a news report by the Financial Times.

Mike Volpi, a general partner at venture capital firm Index Ventures, told the Financial Times that unless absolutely necessary, tech companies should defer their IPO aspirations till the latter half of the upcoming year. 

Venture capital firms invest on a longer-term basis than private equity or public market investors, with their funds often spanning a 10-year time frame, Don Butler, managing director at venture fund Thomvest, told the Financial Times. 

Demonstrating a return on these investments is crucial when soliciting further capital for new funds from supporters, the report added.

Venture capital firms often rely on their startups either going public or finding an alternative exit strategy, like a sale, to deliver profits back to their investors. 

While some view the IPO market as grim, Paul Kwan of General Catalyst told the Financial Times he believes that the notion of IPOs being obsolete is far from the truth.

Private, unprofitable startups face the heat when interest rates surge, primarily because their valuations rest on anticipated future cash flows. Kwan forecasted a spike in M&As among such entities over the next six months, the report added. 

Moreover, some businesses might feel the urge to list earlier due to their capital needs or to manage tax liabilities linked to the vesting of employee stock units, the Financial Times noted. 

Market Predictions: Navigating Uncertain Waters

Jason Greenberg of Jefferies said he thinks the opportunities for even the most powerful IPO candidates are not likely to be clear until interest rates have been stable and the economic outlook is more settled, the Financial Times added. 

"Is the window open? 100 percent," Greenberg told the publication. "Do I think listings will take off? No. Not for another six months."

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This content was partially produced with the help of AI tools and was reviewed and published by Benzinga editors.

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