After a lackluster year for tech IPOs in 2022, the first half of 2023 is unlikely to be much different as many private companies seek to preserve cash and expand their leads in the face of a looming recession.
In total, IPO proceeds fell 94% in 2022 – from $155.8 billion to $8.6 billion – according to Ernst & Young’s IPO report released in mid-December. As of the report’s publication date, the fourth quarter was on track to be the weakest of the year.
The collapse of the IPO market has swelled the pipeline of planned IPOs. These include CNBC Disruptor 50 companies like Chime, Databricks, Gopuff and cybersecurity firm Arctic Wolf, which raised $401 million in October and has reportedly been working with banks on IPO preparations since early 2022. according to Reuters.
Today, there are about 1,210 privately owned unicorns globally — companies valued at $1 billion or more — up from less than half in 2020 and just 950 in 2021, according to data from MKM Partners and CB Insights. MKM’s Rohit Kulkarni is among the few optimists who believe the IPO market could rebound later this year, spurred in part by the volume of private companies waiting in the wings to go public when capital becomes more accessible.
“I think the second half of 2023 will be a bit better than the first, assuming it’s mostly macro-focused,” Kulkarni told CNBC’s “TechCheck” on Monday. He added that we are on the verge of a “new era” for valuations that will be realized once the Federal Reserve stops raising interest rates.
According to Carta, 22% of companies, private and public, reduced their valuations in the third quarter, almost tripling year-on-year. Meanwhile, 34% of companies have seen their valuations rise – its lowest point in five years. The tech-heavy Nasdaq reported its fourth consecutive negative quarter last month for the first time since 2001.
“Private company valuations are still a long way off their public market counterparts,” Kulkarni said, adding that there is a disconnect between the valuations many companies made at the start or end of 2021 and where these companies believe they are valued in the current environment.
“Companies like Klarna and Instacart have already taken this hit, so they might be the ones to watch in the first half. [of 2023] if they’re ready to go public and be the guinea pig there, but I think the vast majority of private companies still think they can achieve the valuations they saw in 2021.”
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, according to The Information. Klarna raised funding at a valuation of $6.7 billion last year, an 85% discount from its previous valuation of $46 billion.
Still, Kulkarni says “everyone can guess” what this year has in store for public registrations. He estimates there will be 40% fewer private unicorns in the world in six months, but “it will be a slow process that will dampen the IPO market in the first half of the year”, due to the anticipated movements of economists from the Federal Reserve.
Sign up for our quirky weekly newsletter that goes beyond the annual Disruptor 50 list, offering deeper insight into the companies making the list and their innovative founders.