IPO outlook improved, but listing will remain a slog for startups

By Marian Temkin

IPO outlook improved, but listing will remain a slog for startups
Double-digit stock returns, strong economic growth and expectations that rate hikes are over have fueled the possibility of an IPO rebound in 2024.

But VC-backed companies hoping to join a flood of new listings are likely in for a disappointment, investors and advisors say.

While the pipeline of IPO hopefuls already includes social network Reddit, data security startup Rubrik and Kim Kardashian’s shapewear brand Skims, it’s a meager list compared to the hundreds of billion-dollar VC-backed companies that were considered to be near-IPO ready during the 2021 tech boom.

“Based on my discussions with bankers, I think it’s going to be another quiet year,” said Ran Ben-Tzur, a Fenwick IPO attorney.

The highest-quality private companies are expected to hold off their public listings until at least 2025 mainly because they need another year or more to grow into their 2021 valuations, investors say.

Meanwhile, the companies that do decide to go public next year face noticeably lower valuations than their last private rounds. Instacart and Klaviyo, two of the most high-profile debuts of this year, were also so-called down-round IPOs.

Cap table conundrums

“I think there may be more [IPOs] next year because a certain number of companies have very complicated cap tables. They can’t raise privately anymore,” said Techstars CEO Maelle Gavet. “Are these going to be the most successful and the sexiest companies? Probably not.”

This complexity of capital structures stems from the fact that investors buying in at different rounds have varying preferential rights. Some shareholders in these startups would not allow new private deals below certain valuations, she said.

Going public could be a solution because in an IPO, all preferred shares convert to common shares, essentially flattening the capital structure, explained Brian Neider, a partner at Lead Edge Capital, a growth equity firm that invests in private and public companies. “The board, in conjunction with management, might decide that the best thing to do is to wipe the slate clean [in an IPO],” he said.

For older companies, providing liquidity to early employees may be another reason they could be open to down-round IPOs. Stock options usually expire after 10 years, and restricted stock units, another form of employee compensation, typically have a seven-year lifespan.

Earlier this year, Stripe raised a significant down round to solve this problem, but other companies would have a more challenging time attracting private capital to help employees sell shares. While the number of businesses with expiring stock options and RSUs is growing, Ben-Tzur said this problem is likely a few years away for most companies.

Doubling up

Maverick Ventures managing director Ambar Bhattacharyya said he has noticed more companies willing to consider either an IPO or an acquisition, which was not the case at the height of the last market boom when most companies hoped for a public debut only.

This strategy, often referred to as a dual-track process, tends to be considered when a company is trying to be acquired. That’s because true IPO hopefuls seldom consider M&A to be an equally attractive alternative.

In November, weight management drugmaker Carmot said it plans to go public. But on Dec. 4, the Column Group-backed startup revealed that it was having simultaneous discussions with Roche and ultimately decided to sell itself to the pharmaceutical giant for $2.7 billion.

“A lot of people might prefer an M&A path over an IPO next year because an IPO window may again not be [fully] open,” said Bhattacharyya.

Although IPO markets are expected to be lukewarm next year, there remains a possibility that if the Federal Reserve indeed cuts interest rates by three-quarters of a point next year, as indicated during the most recent Federal Open Market Committee meeting, the environment for new listings could improve dramatically.

“The message that most venture firms are giving to their best-performing companies is ‘stay ready,’” Bhattacharyya said. “Because IPO markets can open up at any moment in time.”