Creak...is that the IPO market opening?
or is the door falling off the hinge? Insights for pre-IPO startups
The longest medical fast recorded was 382 days by a 27-year-old who lost 276 lbs (!). One needs to be VERY careful when coming out of long fasting so as not to induce “re-feeding syndrome”, which leads to a potentially fatal imbalance of chemicals in your body.
Today, we are approaching an even longer IPO fast. It is over 18 months since the IPO markets closed. If it lasts another six months, this will be one of the longest IPO window closures I have known in 20 years. Right now, we are doing the market equivalent of eating spinach and having sugary water as we emerge from this long fast. It will take time, and small steps are needed if we are to avoid organ failure. But the signs are looking up for a much-needed re-awakening.
Credit: Adobe Firefly
Reasons to be optimistic
Public markets are very strong. Nasdaq is up over 30% YTD; the rally remains narrow (driven by AI), but with rates peaking, volatility falling, and earnings not totally collapsing, buyers are being tempted into the market, especially those that have underperformed this year. It’s a great set-up for investors to try and “buy alpha” by participating in IPOs
State of the private markets
The Forge Global team writes great pieces on the state of the private market, which remains in the doldrums. The private market has stabilized, but overall valuations and VC sentiment seems to have been unaffected by the market rally.
source: Forge
The rally really hasn’t impacted software companies’ valuations (unless they are in AI). Profitable companies, that are growing and are dominant in their fields command valuations of 10x forward sales and those that don’t are languishing in the early single digits. However, the recent stability (reduced volatility) may be good enough to re-open the window if the bid-ask spread between privates and publics can close.
source clouded judgement
This chart would suggest that the market is seeing upround after upround. But the median company is now waiting 20 months to raise capital (the median is going up as most companies are just waiting). The only companies that are raising in this market are those that can (business doing well / hot sector) and, importantly are allowed to raise by their investors. Resulting in either fewer deals or mostly structured deals where the round isn’t priced as the can is kicked down the road.
Source: Forge
Most private companies trade today at around their second to last round valuation (i.e. pre-COVID) but the very best trade close to their last round. If this window opens, it is likely that only these 90th-percentile companies will make it through. Companies, where there is a valuation disagreement (public vs private bid-ask is too wide), will have to wait until they grow into their valuation.
Public markets usually follow a well-trodden path out of the depths of despair into euphoria.
Order to Digestion
Today we are in the Staples box, and I can just see that “flavour of the day” AI IPO waiting in the wings ready to be unleashed, and the dance will start furiously into year-end.
Will the rally falter, and the window remain shut? Three big things come to mind
Interest rate rises take 18-24 months time to impact the real economy. So we could be in the calm before the storm.
China’s economy is in suffering from a huge lack of demand, causing disinflation. This will have global implications
Equity risk premium simply isn’t paying investors to be long the markets today; given bonds are yielding 5.5%, the equity risk premium (additional yield you get for investing in equities) is only 4.38%
Credit: Adobe Firefly
What if you are a pre-IPO company?
Continue to execute your profitability plan but speak to your banker or a trusted advisor sooner rather than later; the window could open and close very quickly. There is a long and growing pipeline of high-quality companies that want to go public. With US elections next year, activity will likely stall post-Labour Day. Having accounts ready, filings up to date and narratives tight will be the key to moving fast. Good luck!