Tech IPO Market Crashes in 2022 Next year doesn’t look much better

Following a stellar tech IPO year in 2021, the electric car maker made its debut in 2021. RivianRestaurant software company Toastcloud software providers GitLab And HashiCorp and stock trading application Robin Hood2022 was a complete dud.

It was the only popular tech offering in America this year. Intel spinoff of My mobileThe 23-year-old company, which makes technology for self-driving cars, was publicly traded until it was bought in 2017. Mobile has raised less than $1 billion, and no other U.S. tech IPO has raised more than $100 million, according to FactSet.

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In the year In 2021, by contrast, there were only tech IPOs in the US that raised at least $10 billion or more, and that doesn’t do anything for live listings. Roblox, Coinbase And Square spaceSince they had very good capital, they did not need to bring foreign money.

The narrative is completely reversed at the turn of the calendar, with investors bailing on risk and hoping for future growth, profitable businesses with balance sheets deemed sufficient to withstand an economic downturn and high interest rates to continue. Pre-IPO companies changed their plans after watching their public market peers fall 50%, 60% and in some cases more than 90% from last year’s highs.

In total, IPO deals fell 94 percent in 2022 — from $155.8 billion to $8.6 billion — according to Ernst & Young’s IPO report published in mid-December. As of the report’s publication date, the fourth quarter was on pace to be the weakest of the year.

With the Nasdaq Composite headed for its biggest annual decline since 2008 and its first year underperforming the S&P 500 since 2006-2007, tech investors are looking for signs of a downside.

But David Coach, chief executive of equity research firm New Constructs, says investors should first grasp the facts and value emerging technology companies based on fundamental and not far-fetched expectations.

As tech IPOs fly in 2020 and 2021, Coach has been waving the warning flag, detailing software, e-commerce and tech-related companies taking their sky-high private market valuations to the public market. Coach calls were seen as ridiculous when the market was on the rise, but many of the choices today seem to be from Robinhood, Rivian and Gentleman. Sweet green Each is down at least 85 percent from its peak last year.

“Until we see a continued return to intelligent capital allocation as a key driver of investment decisions, I think the IPO market will struggle,” Coach said in an email. “Once investors refocus on fundamentals, I think the markets can go back to doing what they’re supposed to do: supporting intelligent capital allocation.”

Lynn Martin, president of the New York Stock Exchange, told CNBC’s “Squawk on the Street” last week that he is “optimistic about 2023” because “the backlog has never been stronger” and the volatility in the market will pick up. to disperse.

For pipeline companies, the challenge is not as simple as overcoming bear markets and volatility. They must acknowledge that the valuations they receive from private investors do not reflect a change in public market sentiment.

The companies that have been funded over the past few years have done so at the tail end of an extended bull run, during which interest rates were at historic lows and technology was driving significant changes in the economy. Facebook Mega IPO in 2012 and millionaires found in the like Uber, Airbnb, Twilio And Snowflake Recycled money back into the tech ecosystem.

Venture capital firms, meanwhile, are competing with new crop hedge funds and private equity firms to pour more money into technology, with many companies choosing to stay longer than private.

There was a lot of money. There was no financial discipline.

In the year In 2021, VC firms will raise $131 billion, surpassing $100 billion for the first time and marking the second consecutive year above $80 billion, according to the National Venture Capital Association. The average post-fund value for VC deals at all stages rose from about $200 million to $360 million in 2021, NVCA said.

Those reviews are in the rearview mirror, and during that time fewer companies have to face reality before going public.

Some high-value late-stage startups have already taken the plunge, though they may not have been dramatic enough.

In July, Strip lowered its internal estimate by 28 percent from $95 billion to $74 billion, the Wall Street Journal reported, citing people familiar with the matter. Checkout.com reduced its valuation from $40 billion to $11 billion this month, the Financial Times reported. Instacart’s sales fell from $39 billion to $24 billion in May, then to $15 billion in July, and finally to $13 billion in October, according to The Information.

Klarna, the purveyor of buy-now, pay-later technology, suffered perhaps the biggest price cut of any big-name startup. The Stockholm-based company raised $6.7 billion in financing this year, an 85 percent drop from its previous valuation of $46 billion.

“In 2021, there was an overdose problem,” said Don Butler, managing director of TomVest Ventures.

Butler doesn’t expect the IPO market to be dramatically better in 2023. Continued rate hikes by the Federal Reserve seem more likely to tip the economy into recession, and there are no signs yet that investors are at risk.

“What I’m seeing is companies are looking at B-to-B demand and consumer demand weakening,” Butler said. “That makes for a tough ’23.”

Butler thinks Silicon Valley will have to adapt to a shift away from a growth-first mindset before the IPO market takes off again. This means not only getting more efficient with capital, showing a path closer to profitability and strengthening hiring expectations, but also requires structural changes in the way companies operate.

For example, startups have poured money into human resources in recent years to manage the influx of people and aggressive recruiting in the industry. According to the tracking website Layoffs.fyi, in a market that sees much less demand for those jobs during the hiring period and 150,000 job cuts by 2022.

Butler said he expects this “cultural reset” to take two more quarters, and added, “That makes me pessimistic about the IPO market.”

One high-value private company that survived the review is Databricks, whose software helps clients store and clean data so employees can analyze and use it.

Data Bricks It raised $1.6 billion at a market peak of $38 billion in August 2021. In the year By mid-2021, the company is on pace to generate $1 billion in annual revenue, growing 75% annually. It was on everyone’s list for top IPO candidates of the year.

Databricks CEO Ali Godisi isn’t talking about an IPO right now, but at least he’s not expressing concern about the company’s core position. In fact, he says that being private today is for his own good.

“If you’re public, what’s important now is cash flow and what you’re doing every day to increase cash flow,” Godisi told CNBC. “I think it’s short-sighted, but now I understand that it’s what the markets demand. We’re not public, so we don’t have to live by that.”

Godisi says Databricks has “lots of cash” and that even in “sky-falling” situations like the 2000 dot-com crash, the company is completely soundly funded without raising any cash.

Databricks has avoided layoffs and Godisi said the company plans to continue hiring to take advantage of available talent.

“We’re in a unique position, because we’re very well capitalized and private,” Godisi said. “We take an asymmetric strategy when it comes to investments.”

That approach could make Databricks an attractive IPO candidate at some point in the future, but the valuation question remains a concern.

Databrick’s closest public market counterpart, Snowflake, has lost two-thirds of its value since peaking in November 2021. In 2020, Snowflake’s IPO was the largest for a software company in the US, raising nearly $3.9 billion.

Snowflake growth has remained strong. Revenue rose 67 percent last quarter, beating estimates. Adjusted profit was better than expected, and the company said it had $65 million in free cash flow in the quarter.

Still, the stock is down nearly 20% in the fourth quarter.

“The sentiment in the market is a little depressed,” Snowflake CEO Frank Slotman told CNBC’s Jim Cramer after the earnings report on November 30. Go a quarter of the day at a time.

— CNBC’s Jordan Novett contributed to this report.

See: Snowflake CEO on the company’s light guide