How Startups are Faring in the Frozen IPO Market

hroughout the majority of the pandemic, the market for initial public offerings in the U.S. boomed, with a record 480 in 2020 and then an astonishing 1,035 in 2021.

The startup community didn’t wait for the world to return to normal, and many went public, quickly rising to meteoric valuations. Another group of startups took complete advantage of special purpose acquisition companies (SPACs) and partnered with shell companies to go public earlier than they would have in less frothy conditions.

But now, due to higher interest rates and extreme market volatility currently making a mockery of post-SPAC companies, that time has now come to a swift end and things have come crashing back to reality. The market for IPOs is now frozen – there have been a total of 159 IPOs through September of this year.

Some of the largest, most anticipated late-stage startups like Chime and JustWorks have delayed their IPOs. And now, their valuations are likely taking a haircut as the public markets continue to get pummeled.

This presents a problem for later-stage startups as going public is one of the main ways startups exit and repay their investors. So, what are these companies doing with the public markets in disarray and as they burn through cash?

Well, the obvious next-best exit plan from an IPO is to get acquired. As such, acquisitions are up in the startup space this year.

In 2021, according to Crunchbase, 1,283 startups were involved in acquisitions, up from 689 in 2020 and 599 in 2019. In 2022 through the first half of the year, 663 startups got acquired by other companies that had received venture funding, which is on pace to eclipse 2021 levels.

“There are over 7,000 venture-backed companies and a record number of seed deals,” said Kyle Stanford, a senior analyst at Pitchbook, according to Crunchbase. “There will be a lot of companies that will struggle to raise this year that will be easy targets for companies looking to acquire.”

Acquisitions are not always a bad solution either. It allows founders to repay their investors, likely solve any financial issues the companies might be dealing with, and maintain a lot of jobs for employees.

While there have been reports of a funding slowdown, with investors worried about rate hikes pushing the economy into a more severe recession, there is still a lot of dry powder floating around. VCs raised more than $128 billion in 2021, which is the first year VC fundraising surpassed more than $100 billion.

As reported by The Information, VC funds still have a war chest of $290 billion of dry powder, more than half of which is being saved for new investment, according to Jon Sakoda, founder of Decibel Partners.

“The fundraising has been so substantial even though it feels like things are slower,” said Sakoda. “At some point, the floodgates will open.”

In theory, with this kind of dry powder sitting around, VC investment could have another big year in 2023.

And we know from GoingVC’s recent conversation with Atin Batra, the founder and general partner of the edtech fund 27V, that tough market conditions don’t necessarily mean investors are sitting on their laurels.

After all, market conditions were so crazy in 2021 that it wasn’t considered such a great time to be an investor because of the astronomical valuations. Now, investors have a chance to get in at the more reasonable valuations they are used to. 

Startup valuations may not be done falling either. According to Pitchbook, most late-stage startups will raise funding every 16 to 20 months. As of early September, several high-profile, late-stage startups such as Ripple, Instacart, Stripe, and Patreon were in that range, which means ‘something’s gotta give.’

Of course, the future is still quite murky in terms of whether or not there will be a severe recession in 2023.

The Federal Reserve, which is currently projecting to keep raising interest rates at its November and December meetings, could suddenly reverse course and cut rates if there is a more severe recession or inflation shows signs of declining. That would likely create a more friendly environment for startup fundraising but only time will tell.