After a lackluster year for tech IPOs in 2022, the first half of 2023 is unlikely to be much different as many private companies scramble to conserve cash and lengthen their runways amid a looming recession.
Overall, IPO deal proceeds fell 94% in 2022 — from $155.8 billion to $8.6 billion, according to Ernst & Young’s IPO report released in mid-December. At the time of the report’s publication, the fourth quarter was on track to be the weakest of the year.
The collapse of the IPO market has caused the pipeline of anticipated listings to swell. These include CNBC Disruptor 50 companies such as Chime, Databricks, Gopuff and cybersecurity firm Arctic Wolf, which raised $401 million in October and has reportedly been working with banks to prepare for its IPO since early 2022, according to Reuters.
Today there are about 1,210 private unicorns worldwide — companies worth $1 billion or more — compared to fewer than half in 2020 and just 950 in 2021, according to data from MKM Partners and CB Insights. MKM’s Rohit Kulkarni is among a few optimists who believe the IPO market could rebound later this year, spurred in part by the volume of private companies primed to go public when capital becomes easier becomes accessible.
“I think the second half of 2023 will look a little better than the first half, assuming it’s mostly macro driven,” Kulkarni told CNBC’s TechCheck on Monday. He added that we are on the precipice of a “new era” for valuations to be realized once the Federal Reserve stops raising interest rates.
According to Carta, 22% of private and public companies cut their valuations in the third quarter, nearly tripling year over year. Meanwhile, 34% of companies saw their ratings increase – the lowest in five years. The tech-heavy Nasdaq last month reported its fourth consecutive negative quarter for the first time since 2001.
“Valuations of private companies are still far from their public market peers,” Kulkarni said, adding that there is a disconnect between the valuations many companies have achieved in early or late 2021 and where those companies believe they will be that they are valued in today’s environment.
“Companies like Klarna and Instacart have already taken that hit, so maybe they should be watched in the first half [of 2023] when they’re ready to go public and be the guinea pig out there, but I think the vast majority of private companies still think they can grow to 2021 valuations.”
According to The Information, Instacart reduced its valuation from $39 billion to $24 billion in May, then to $15 billion in July and finally to $10 billion in December. Klarna raised $6.7 billion in funding last year, an 85% discount from the previous figure of $46 billion.
Still, Kulkarni says “it’s anyone’s guess” as to what will be available for public listings this year. He estimates that in six months there will be 40% fewer private unicorns globally, but “that will be a slow process, holding back the IPO market for the first half” due to Federal Reserve moves economists anticipate.
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