Initial public offerings have hit the pause button in the past months – at least until recently.
Last week, CAVA (NYSE:CAVA), a Mediterranean restaurant concept, successfully floated shares on the NYSE, seeing the shares rocket on the first day of trading. The strong showing in the big board has led some to ask if the IPO market is starting to show some signs of life.
Private marketplace EquityZen believes that “the dust may have settled” for startups hit by Silicon Valley Banks’ implosion but the aftershocks continue to impact the broader venture market. On top of this, there are rising rates, inflation, and general concern for the state of the economy.
At the same time, the NASDAQ has rallied almost 30%, and the VIX is trading at 13. There are signs of hope, says Brianne Lynch from EquityZen.
She notes there are three main paths to raise funding: an IPO, a primary raise, and debt financing. Each of these has been impacted by the floundering economy as IPO proceeds have declined by 61% year over year. But there are 1200+ unicorns waiting for the opportunity to list their shares on an exchange.
That’s a lot of pent-up demand for liquidity,” says Lynch. “Most of these companies will wait for a prolonged rally in tech stocks, more certainty around rates and inflation, and ultimately the successful IPO of a blue chip tech start-up to lead the way. For now, the IPO market remains quiet.”
From her perspective, she believes private firms may decide to raise capital in a primary private round. There is a lot of dry powder on the sidelines, yet VCs are beng “judicious” in the deployment of their month.
“Pitchbook estimates that for every $3.13 demanded by late-stage founders, there is just $1 of capital available with dealmaking by count and volume both down year-over-year. For companies who are able to raise capital, this may likely come as a “down round,” especially if they last raised capital in the market heyday of 2021. The private secondary market is already reflecting the new market norm with companies trading at an average 40% discount to their last funding round on EquityZen’s platform,” Lynch says. “These prices largely mirror what occurred in the public markets last year but have yet to be widely formalized through primary funding rounds. Of course, the story is not uniform across industries and companies. In some of the most in-demand industries amongst our investors, like artificial intelligence (AI) and Fintech, some companies are trading at lesser discounts. The same story is true for companies that raised new funding in the past year. Nonetheless, we expect to see more announcements of down rounds in the coming months. While this may be a tough pill for some companies to swallow, it will allow for a healthy reset in the venture markets, which should spur additional primary and secondary activity. “
The debt option has changed, too, says Lynch. Silicon Valley Bank was the lender of choice to the startup community. In their absence, there is yet to be another player to to step in. Rate hikes have naturally cooled demand too. Both of these factors have resulted in a tighter credit market for private companies.
So what happens from here?
“These compounding factors may, in fact, lead private companies to IPO, and we’re seeing some buds of optimism. Kenvue, the U.S.’s largest IPO since Rivian in 2021, went public last month raising $3.8B in IPO proceeds and finishing up 22% after its first day of trading. Arm, the British microchip company backed by Softbank, confidentially filed for a U.S. IPO in late April, reportedly seeking to raise $8-10B. With sales reportedly up 28% in its most recent quarter6, they may be in a strong position to test public market appetite. Perhaps these are the indicators, and hopeful success stories, that other private companies have been waiting for as they consider their own public market debut. To make sure they are ready, many private companies are quietly putting the people and processes in place in preparation.”
While the IPO market remains cautious, demand exists for liquidity of private shares – EquityZen’s wheelhouse. Lynch adds that investors may be able to access private shares at a reasonable discount before an IPO takes place, and the current market necessitates secondaries.