The Game Of ‘IPO Musical Chairs’ Has Stopped

The market for initial public offerings has been frozen for more than a year, and it is expected to remain so in the first half of 2023 due to the turmoil caused by the collapse of Silicon Valley Bank. As a result, cash-strapped startups are facing funding difficulties. 

The increase in capital costs over the past year has resulted in a drop in the valuation of unicorn companies. The ongoing effects of the SVB crisis are expected to dampen the IPO market further, leading to additional funding challenges for startups. This situation also poses a problem for venture capital funds that paid record-high prices for these companies, as they cannot offload their positions to retail in the secondary market. 

“When you’re not able to exit these companies, the whole thing falls apart.

“It’s a bigger, systemic problem,” Robert Cote, chief executive officer of Cote Capital, warned Bloomberg. 

For the last year, readers have been well-informed about the drought in offerings (recall: “IPOs Vanish As Market Mayhem Saps Deal Appetite”). 

Bloomberg data reveals that IPOs have only managed to raise $2.4 billion in 2023, which is 43% lower than the amount raised at this point last year and a staggering 95% plunge from the $48 billion raised during the same period in 2021.

Turmoil in the IPO market is creating problems:

“We’ve been stalled for more than a year.

“It caught people off guard because they didn’t expect to not have the ability to IPO in this amount of time,” said Patricia Adams, a partner at Vinson & Elkins LLP. 

Startups are structured with the intent of going public or being acquired. However, when funding sources dry up and avenues to the secondary market become more challenging to navigate, the cycle of investment and growth grinds to a halt. This puts startups with weaker financial balance sheets at risk of bankruptcy, and venture capitalists who overpaid for these companies may be hit with mounting losses.