San Francisco is likely to see something this week that neither it nor the Bay Area has seen in six months — an initial public offering by a local tech company.
Even if all goes well with Reddit’s offering, IPOs are unlikely to become as common in the near future as they were three years ago, market experts say. But many expect it could lead to a pick-up in offerings later this year, which could have big implications for the local economy and The City’s finances.
“I don’t believe this is a harbinger of a wide-open IPO market,” said Robert Siegel, a lecturer in management at Stanford Graduate School of Business. But, he added, “It could certainly help … success begets success.”
As recently as three years ago, IPOs happened frequently in San Francisco and the wider region. On average, in 2019 and 2020, a city-based startup went public nearly every month. Across the Bay Area, about three went public every month, according to data from Renaissance Capital, a financial firm that closely tracks the IPO market.
That pace quickened in 2021, with about three San Francisco startups going public every two months and almost five per month across the region.
But the IPO market slammed on the brakes the following year and hasn’t rebounded since. When Reddit hits Wall Street this week, it will be only the second company of any kind based in The City to go public since the end of 2021 — following Instacart in September — and only the fourth tech company from the entire Bay Area, according to Renaissance Capital.
The 2022 tech IPO tally matched 2008 for the lowest ever since 1980, according to Ritter’s data.
The IPO slump, in part, can be blamed on the huge stock-market boom that immediately preceded it, market experts said. The stock market soared in 2020 and 2021 as the Federal Reserve slashed interest rates and pumped money into the economy to fight the recession sparked by the COVID-19-related lockdowns.
That sent company valuations relative to revenue or earnings through the roof and lured many startups — ones that generally wouldn’t have hit Wall Street in a more normal market — to go public. It also attracted investors eager to get an early stake in hot new public companies, no matter how unprofitable or immature they might be.
When the market started to fall in late 2021 amid rising interest rates, soaring inflation, geopolitical instability with the impending Russian invasion of Ukraine and fears of a recession, many of those newly public companies saw their stock prices get crushed.
Some went out of business completely, unable to raise new funds to make up for their ongoing losses. Others saw their shares delisted from the major markets because their prices or market capitalizations had fallen below market requirements.
Having swallowed major losses on newly public stocks, many investors lost their appetite for investing in IPOs, particularly by companies that were losing money and didn’t have the prospect of turning profits anytime soon.
The market for newly public companies “got really frothy” in 2020-2021, said Kristin DeClark, global head of technology investment banking at financial giant Barclays.
“Investors don’t forget that,” DeClark said. “They know how much pain they were inflicted trying to get out of those positions.”
The run-up in public market valuations during that period led to a corresponding jump in the valuations of private startups, since their worth is often pegged to that of similar public companies. But while public-company values rise and fall on a daily basis with their stock prices, startup valuations are much more static, typically only getting adjusted when the company raises funds or authorizes a sale of stock by insiders.
Few startups that raised funds in the go-go days of 2020 and 2021 have wanted to go public at a valuation that would be lower than what it was then. A big part of the reason companies go public is to allow employees to cash in on stock options and their venture investors to get a return on their investments. But if a company goes public at a value less than it was worth when it handed out those options or sold shares to venture firms, neither will get to cash out in the immediate wake of the IPO.
On the flip side, public investors burned by what happened three years ago have been wary of overpaying for newly public companies, said Avery Marquez, an assistant portfolio manager at Renaissance, which provides exchange traded funds comprised of recently public companies.
“Valuation has been and probably for the near term will continue to be a sticking point” for companies seeking to go public, Marquez…
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