That Intel managed to spin out Mobileye as a public company was good news of sorts for the technology exit market. But a single successful corporate spinout is not a sign that public-market tech debuts are back.
Indeed, with news that Instacart is now pushing for a 2023 IPO, the upcoming calendar for tech exits (apart from M&A) is more than weak. It’s moribund.
What does Instacart’s supposedly delayed IPO teach us about how unicorns think?
Perhaps that’s why the Twitter-Musk saga — an anti-IPO in that we’re seeing the social media company go private — is consuming so much oxygen: There’s not that much else going on when it comes to fascinating exits. Well, the UserTesting sale aside, I suppose.
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What we care about is understanding when IPOs may return, as they could provide another method by which late-stage startups can raise capital. Currently, there’s concern that some unicorns are uninvestable and will therefore die. More capital to the cohort of billion-dollar startups could alleviate some of those pressures, not to mention help confirm the new pricing chart for startup shares.
So what do we need to kick off the IPO market? I chatted with Oak HC/FT co-founder and investor Andrew Adams recently about just that, and his perspective, while reasonable, is less aggressive than we might have hoped.
It appears that the S-1 drought is set to continue until some brave company breaks the logjam in style.
What it will take to break the IPO dam
This column asked Adams when we might expect the IPO market to come back. Will it return in Q2 2023? The back half of next year? Further in the future?
“I don’t have a good answer for you,” Adams told TechCrunch, because “nobody’s talking about it.” Why is that the case? It’s not just lackluster tech valuations putting pressure on late-stage startups to take a massive valuation cut to go public. There’s more going on.
“The quality,” Adams said, “near the end [of the last IPO cycle] was not what it should be if you’re going public.” With the post-IPO performance of so many tech companies from the last IPO wave suffering — with many companies underwater or worse — market sentiment about new debuts is “so negative,” the venture investor added.
What could change the dynamic? A strong debut swimming against the current of present sentiment. “I think the first one out,” Adams explained, will need to be “a bulletproof company.” How does he define such bulletproofness? Such a company will need to have “the team, the market, the scale, the P&L,” he said.
That’s a tall order. A great team is doable, but the market is harder given what Big Tech just told the world about the state of tech buying (i.e., that it is slowing down in many areas). Past that, scale is also possible, given the number of unicorns that have reached nine figures of revenue. Having a clean loss sheet, however, will prove difficult. Many unicorns that reached scale did so on the back of huge capital raises that they pushed through their organizations; the resulting losses are likely not that far in the past.
Mix in the fact that growth is never out of style, and any tech company looking to debut is going to have to nail every area of vetted performance to break the IPO bottleneck. Who might manage it? We don’t know. Instacart could still be the first unicorn or decacorn to try the markets. It could also be a dark horse like Egnyte, which has long wagered its value on slower growth and profits than faster growth and deficits. (Recall that Egnyte crossed the $150 million ARR threshold earlier this year.)
What matters is that we aren’t going to see a rush of filings any time soon. If tech IPOs are stuck waiting for an S-1 in shining armor to bring back public-market exits, we could be waiting for a long time yet.
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