(Jade Gao/AFP/Getty Images)
It's been an exciting few weeks for the IPO market.
Chinese fast-fashion brand Shein filed for a US IPO last week, according to reports from Reuters. Reddit, Skims and Microsoft-backed Rubrik are also reportedly planning to make their public debuts in the coming months.
That's a big deal for an ailing IPO. While 2021 was a record-breaking year for companies looking to make their public debuts on the US stock market, dealmaking on Wall Street has largely dried up since then.
And while a revival would be good news for bankers' bonuses, the benefits extend beyond the wallets of the Wall Street elite.
IPOs help facilitate the flow of capital to innovative and growing companies – they support job creation, economic expansion and technological advancement. Going public also requires companies to become more transparent with their finances, shedding light on often opaque business models and keeping firms honest.
But an IPO renaissance on Wall Street is not quite here yet, says Angela Lee, a professor of venture capital at Columbia Business School and founder of the startup investment network 37 Angels.
Before the Bell spoke to her about the prospects for the IPO market and what it'll take to bring an end to the deal drought.
This interview has been edited for length and clarity.
A lot of companies are waiting for better economic and market conditions to make their public debut, and there's an idea that one large and successful IPO could clear things out and get that pipeline going again. Could Shein be it?
People try to draw an analogy between the IPO market and a blocked pipe. That's not how it works. You have to take each IPO separately. I think what has happened is that it seems like interest rates have stayed put. It seems like the Federal Reserve has indicated that interest rates aren't going to go up dramatically in the short term. That is one reason why the IPO market feels less stymied than it did 12 months ago. But if the current IPO market kicks off, it's because of other macroeconomic factors. It's not because one big IPO unblocked something, that's very silly.
We've got a lot of high profile names out there indicating that they'll make their debuts. Does that mean the economy overall is more accommodating to IPOs?
If you look at Skims, Shein and Reddit, I would separate them. Shein is the typical growth at all costs company. They're going to very rapidly acquire customers and care much less about long term financial sustainability and climate and the environment. That's one category of companies. What we have seen recently is that the market is favoring and paying attention to things like profitability and good unit economics and margins.
If you look at what Reddit did, in April they announced that they would change the way that APIs interact for Reddit. [APIs, or Application Programming Interface, are access points for interacting with a platforms' data. Reddit now charges skyhigh fees for third party apps that want to access its data.]
The reason they did that is because they're trying to make it more profitable, they're saying 'it's not just that we have a huge user base, but we know how to profitably monetize that user base.' My strong suspicion is that they were doing that to prepare themselves to look more favorable to a public market.
People seem to think that the IPO is the destination and it's not. The IPO is one milestone, but then you have to run on the public markets, and the public markets are not very forgiving of companies that grow at all costs without thinking about financial sustainability. So if a company like Shein goes public, depending on how they do once they're on the market, it might not make people feel better.
Obviously 2022 was a terrible year for IPOs and mergers and acquisitions. This year has been a bit better, but not much. Do you think next year will be a turning point?
It depends on which side you're sitting on. It's a great time to be an acquirer of companies. There are a lot of companies that have good business models, good customer growth and good economics, but because it is a buyers market they're being traded at much lower multiples than they were two years ago. So if you're a buyer, and you're looking to acquire a company, it's actually a fantastic time to buy. But I'm sure that the people who are selling don't feel that way.
People keep saying that everything is so down compared to 2020 and 2021. To me, the story isn't that things are down, it's that we all collectively went crazy in 2020 and 2021, and that we've returned to the state of normalcy. There have been about 150 IPOs so far this year and historically, about 200 companies go public each year. So it's down a little bit, but the reason why it seems catastrophic is because there were 480 IPOs in 2020 and 1035 in 2021. Those were crazy years, you can't look at those years for comparison. Yes, 2023 is down but not catastrophically.
What about next year? Will things continue to normalize in 2024?
I think we are going to be closer to a couple hundred IPOs in 2024. But again I think you have to differentiate between the number and then the valuation multiple. I think we'll have a more normal year in terms of the number of IPOs, but I do not think they are going to be at the valuation multiples of 2019 through 2021, recognizing that nobody can predict the future.
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