Say Goodbye to Tiny IPOs, Investors Warn
Some of the world’s biggest tech investors have a reality check for companies thinking about going public: While the initial public offering market is showing signs of life, smaller companies that made the cut during the last boom cycle don’t have a shot now.
“There were a lot of companies that went public in the last cycle when there was a lot of exuberance that were too small,” said Anton Levy, co-president of General Atlantic, speaking at The Information’s Private Capital Conference. “Any company that went public at less than a $1 billion market cap, with probably a few exceptions, is probably disappointed that they did,” he added. Levy said IPOs will remain “very selective” this year and the floodgates won’t open like they did two or three years ago.
The Takeaway
• Coatue’s Philippe Laffont says, “You can’t go public without $1 billion in revenue”
• Investors predict wave of private company M&A
• BlackRock executive predicts less than 20 IPOs by year end
Even with last month’s successful debuts by Reddit and Astera Labs, plus a flurry of IPO filings from companies including Ibotta and Rubrik, today’s market conditions remain more restrained than the IPO frenzy that peaked in late 2021. That year saw the public debut, through either IPOs or mergers with special purpose acquisition companies, of some well-known but relatively small firms, including Rent the Runway, BuzzFeed and Allbirds. Many of those companies are now struggling.
Philippe Laffont, chief investment officer of Coatue Management, echoed Levy’s sentiment. “In the past, you could go public with a $500 million market cap…[and] $50 million in revenue,” Laffont said. “Today, we think that you can’t go public without $1 billion in revenue, $10 billion in market cap.”
Tony Kim, managing director of fundamental equities at BlackRock, estimated that less than 20 tech firms will go public by the end of the year and thinks artificial intelligence companies in particular should be able to secure favorable valuations. But there haven’t been any dramatic changes in the IPO pipeline recently, he said, and investors such as mutual funds and exchange-traded funds aren’t interested in a company until its market value is at least $5 billion or $10 billion.
“Investment bankers, they would tell you that the markets are back and animal spirits are back. Some of them are positively inclined to that, because the environment seems a little bit more conducive, ” Kim said. “However, from my perspective, I don’t think anything has changed. It’s good companies at the right price.”
When asked about still-private firms that had landed billion-dollar-plus valuations, Kim said there is a large inventory of private companies and there will likely be a shakeout. “As a public investor, there is another threshold of relevancy,” Kim said. “If you are in the same category [as your competitors], and you are smaller and you’re growing less, why should I care [about you]?” he said.
The kinds of companies that two or three years ago would have been inundated with calls from advisers and bankers looking to help them go public aren’t getting the same number of calls now, said Jean Park, a partner at law firm Cooley. The current moment is better for larger companies, Park said.
“A $100 million, $200 million [annual recurring revenue] looks very different nowadays,” Park said. “The likelihood of that just being able to make it feels very different now than it did a couple years ago.”
A number of investors speaking onstage at the Private Capital Conference predicted a wave of consolidation in the private markets as companies put off going public. “There are going to be more mergers in the private market among companies,” Laffont said, though such deals can be difficult to pull together because “one founder needs to concede to another.”