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While many VC investors, and most likely their limited companies, were hoping for a return of IPOs in 2024, this has not happened and is unlikely to happen in the next couple of months.
Nasdaq CEO Adena Friedman isn’t surprised.
Friedman said at Axios’ BFD event on Tuesday that although the public markets had a great year on paper with… S&P 500 index rises about 22%There is more to the story than the title number. The S&P is overweight toward larger-cap companies, as it should be, Friedman said. Based on the strength of such companies as Apple, Nvidia, Microsoft, and others, this corporate index performed well.
But not all areas of the public market are having a great year, and those companies with smaller valuations are really struggling.
“It’s a bit of a tale of two cities,” Friedman said. “Large-cap, which has done very well, and you can kind of see in the S&P 500, you have a 10% valuation increase in large-cap. But if you look at the small-cap index, it’s actually down 10%.
While the exact definition of a small-cap company varies, there is general agreement that it refers to companies valued at less than $2 billion, which would fit a great deal of today’s late-stage startups. This is a data point that tells them that investors are not interested in them.
Many late-stage startups aren’t quite ready to go out and have a successful IPO, Friedman said. Companies want to have a really strong financial year before they debut, which many companies likely don’t have yet after the more difficult 2022 and 2023. In this climate of high interest rates, any company still in the red and burning through cash to support its growth could face a particularly harsh reception from public investors.
“They want to have 12 months of really strong performance before they start thinking about exiting,” Friedman said. “The cost of capital environment has made companies, which rely on capital to continue growing their businesses, trading at a decided discount.”
It doesn’t hurt that private markets are becoming a safer place for businesses, too. The secondary market has been particularly hot all year – where investors buy shares in private companies, often in company-approved transactions. This has allowed late-stage companies to obtain some needed liquidity for their investors and/or employees. Therefore, VCs do not appear to push their portfolio companies toward the public market in these less than ideal circumstances. One example is telemedicine provider Ro, which was last valued at $6.6 billion when it raised money in 2022. Ro CEO Zach Reitano said the benefits of remaining a private company were mounting about an hour before Friedman took the stage.
Friedman said she believes IPOs will start to return with momentum in 2025. She added that there have been some recent positive IPOs in the biotech space that have shown there is an appetite for these young companies. For example, Tempus AI had a successful debut in June; and raised $410 million; So did Bicara Therapeutics in September, raising $362 million, among other things. However, despite Friedman’s optimism, some biotech companies have gone public this year He did not see their stock prices maintain their IPO day prices.
She also naturally believes that there is a good reason for companies to go public because they spread the wealth to more than just a handful of private investors.
There have been 14 venture-backed IPOs in the U.S. this year through the third quarter, according to PitchBook data. There have been 51 in total so far in 2024, meaning this year may not even match last year’s total of 86 or 81 in 2022.
There appears to be more momentum for the 2025 IPO market already brewing with names like Chime, Klarna, and CoreWeave all appearing to be moving in this direction.
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