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What’s Caused The IPO Drought?

Large companies and startups are stepping back from going public. Here’s why

18Aug

When companies go public, the stock market becomes an entertaining scene, where attention is centered around the rollercoaster of share prices. These days, however, fewer companies, especially in the tech sector, consider such a move, making the IPO market look like a desert, with a couple of tumbleweeds occasionally passing by.

Behind the drought in IPOs are increased risks, heightened volatility in the stock market, and the unwillingness of companies to go public because there are better prospects in staying private. The stock market's reaction is hardly predictable for new entries. The initial pricing is full of surprises, due to many new businesses having never been valued before, so there are no management assurances to work with. Such market behavior not only scares new players, but also makes those who have been convinced to go public pivot. According to Birstingl's report, 12 companies have called off their plans to launch an IPO this year - the highest number since 2008.

External factors have also played a big role in the IPO’s market stagnation, including falling oil prices, a slowdown in China's economy, and political uncertainties, like the EU referendum and upcoming elections in the US. According to PwC's Technology IPO Review, the tech IPO market nosedived from 22 IPOs worth $10.8 billion in Q4 2015, to 10 IPOs worth $769 million in Q1 2016. Tech unicorns usually being one of the pillars of IPO held back, choosing to wait for better timing and improved sentiment for their high valuations.

The assurance that going public will attract a lot of capital is not there anymore. The reason doesn't lie in sellers, but in changing attitudes among buyers. Investors are changing their behavior in favor of indexed products, making the IPO market institutional in terms of investments, rather than individual. Thus, disruptors like Uber and Airbnb are not going public, despite the rumors. Those companies feel comfortable being private, with Uber recently having raised another $3.5 billion from Saudi Arabia's Public Investment Fund. Already valued at $30 billion, Airbnb has overgrown its public hotel rivals, and there is simply no reason for disruptors to issue a public offering, at least for now.

The current situation in the IPO market may mean that going public is no longer the only lucrative option, with funding rounds offering much more action and flexibility in the market. Fundraising also allows for global expansion, while avoiding complex investor relations and regulations that public listing is known for.

Companies like Alibaba Group and Twitter are examples of when IPO went wrong. After its first year as a public company, Alibaba's stocks fell 28%, despite performing strongly in the very beginning. Twitter and e-commerce solution company Square also show inconsistent performance, with the latter trading bellow its IPO price, and Twitter now a permanent rollercoaster with shares struggling to stay afloat.

Being a source of additional capital is no longer enough of a reason for tech companies to go public. In fact, there is a 40% slowdown in their innovation performance after they take this step, according to Shai Bernstein, Assistant Professor at Stanford Graduate School of Business. Tech startups are looking for a combination of funds and inspiration, therefore, they are more willing to be acquired by Google, Apple, and other tech giants, rather than taking a risk by going public.

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