IPOs are Emerging from Hibernation
The Next Investment Bubble is Forming
Today the initial public offering (IPO) pipe is virtually closed but there a slight crack of daylight streaming-in.
A copious IPO pipe is a key element of a healthy financial circulatory system.
An IPO describes the process through which a company goes from being privately-held to being a publicly-traded entity on a stock exchange. This important financing vehicle for private companies represents a key evolution from being an “upstart” to a mature business worthy of raising significant funding for scaling and operating expenses. IPOs also provide liquidity to the founders, executive management team (ELT), management, employees, advisors, and early investors, such as angel investors, VC and PE funds. Other benefits of IPOs include a boost in reputation, an expanded investor base, a transparent valuation, and post-IPO liquidity for investors and additional compensation for company employees who now can succeed when the company succeeds.
A healthy IPO pipeline is an important part of financing the expansion of the technology industry which plants crops of startups requiring care, feeding and financing in hopes that a few successful harvests will yield the capital for the next generation of “seed” investments.
The lead article in yesterday’s (6/10/23) edition of Axios Pro Rata is entitled: IPOs show signs of life. In her analysis, author Kia Kokalitcheva reports that in 2023, there have been 44 initial public offerings (IPOs) in the U.S., that have raised a combined $7.3 billion. This years’ pace is on track to surpass last year's 71 listings that raised $7.7 billion, but is still significantly shy of the397 IPOs raising $142.4 billion, in 2021.
As a hopeful signpost of things to come, last Monday, Cava – the fast-casual Mediterranean restaurant chain – filed to go public. It is seeking to raise up to $274 million at a potential valuation of $2.1 billion.
Additionally, in May, Johnson & Johnson's spinoff of Kenvue, J&J’s consumer business, raised $3.8 billion, reaching a market cap of $50 billion on its first day of trading.
Many VC-backed unicorns would like their next financing round to come from the public markets. However, due to the uncertainty of the markets, many IPO-worthy companies have held-out from filing their S-1s (which signals an intent to become publicly-traded) rather than selling at a discount on the NASDAQ or NYSE during a down market. This is fairly common, and despite a desire to “go public” now, many of these companies will find bridge-funding that will support them until the IPO-pipe swells and both the Street and mainstream investors return to investing in newly listed public companies.
Carlota Perez, an economist and author of Technological Revolutions and Financial CapitalThe Dynamics of Bubbles and Golden Ages, theorized that major economic transformations occur in cycles driven by waves of technological innovation. According to her theory, there are specific phases within each cycle: the installation phase, the deployment phase, the turning point or financial bubble, and the synergy phase.
During the turning point or financial bubble phase, speculative investments and financial excesses tend to occur. This phase is characterized by a surge of investment in new technologies, often fueled by a level of optimism and euphoria that seems disinterested in business fundamentals. In this stage investors exhibit irrational exuberance, leading to the formation of bubbles in certain sectors or asset classes. Eventually, these bubbles can burst – like the Internet Bubble in 2000 – leading to a period of market correction or even a recession. This is also termed a “Nuclear Winter” for VC when they stop or severely limit investing – similar to what we are experiencing now.
Perez's work is highly recommended reading at this time. While it focuses more on long-term structural changes in the economy rather than short-term market dynamics leading into a investment bubble driven by IPOs, her analysis of the preliminaries that pre-date an investment bubble is very instructive, insightful and relevant to what we are seeing today.