While many venture investors, and likely their LPs, were hoping IPOs were going to come back in 2024, that hasn’t happened and isn’t likely to in the next two months.
NASDAQ CEO Adena Friedman isn’t surprised.
Friedman said at Axios’s BFD event on Tuesday that while on paper the public markets have been experiencing a spectacular year with the S&P 500 up about 22%, there’s more to the story than the headline number. Friedman said that the S&P is overweight toward larger cap companies, as it should be. And on the strength of such companies Apple, Nvidia, Microsoft and so on, this index of companies has 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 little 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% kind of valuation increase in a large cap. But if you look at the small cap index, they’re actually down 10%.”
While the exact definition of a small cap company varies, there is a general agreement that it refers to companies under $2 billion which would fit a substantial amount of today’s late-stage startups. So that’s a data point telling them investors aren’t so interested in them.
Many late-stage startups are also not fully ready to go out and have a successful IPO, Friedman said. Companies want to have a really strong year of financials before they debut, which many companies likely don’t have yet after a tougher 2022 and 2023. And, in this atmosphere of higher interest rates, any company that is 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 to think about coming out,” Friedman said. “The cost of capital environment has made it so that companies, those that are relying on capital to continue to grow their businesses, are definitely trading at a discount.”
It doesn’t hurt that the private markets have become a safer place for companies to hang out as well. The secondaries market has been particularly hot all year – where investors buy stock in private companies, often in company-approved transactions. This has allowed late-stage companies to get some needed liquidity for their investors and/or employees. So it doesn’t seem like VCs are really pushing their portfolio companies toward the public market in these not-ideal conditions. One example is telemedicine provider Ro, last valued at $6.6 billion when it raised cash in 2022. Ro CEO Zach Reitano said the benefits of staying a private company are growing just about an hour before Friedman took the stage.
Friedman said she thinks IPOs will start to return with momentum in 2025. She added that there have been some positive recent biotech IPOs that have shown there is appetite for these younger companies. For instance, Tempus AI had a successful debut in June; raising $410 million; So did Bicara Therapeutics in September, raising $362 million, among others. Though, despite Friedman’s optimism, some of the biotech’s who went public this year didn’t see their share prices maintain their IPO-day prices.
She also naturally thinks that there is a good reason for companies to go public as it spreads the wealth to more than just a handful of private investors.
There were 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 86 total or 2022’s 81.
There does seem to be more momentum for a 2025 IPO market brewing already with names like Chime, Klarna and CoreWeave all seemingly moving in that direction.