The pre-IPO issue
There’s a large backlog of companies right now in the pre-IPO phase patiently waiting for the markets to rebound so they can go public. The IPO market has effectively been dead all of 2022 and combined with the pandemic and market of 2021, we’re seeing a larger than normal backlog of companies.
The pandemic of 2020 closed the IPO market for just about half the year starting in March.
Most executive teams updated their plans to push back exit plans for another 1-2 years to 2021, 2022, or beyond.
That lead to a flurry of exits in 2021 with the market “booming” and capital effectively free. (A lot of companies that were not ready to be public also went public through SPACs)
Those that didn’t make it to the public markets in 2021 or were planning to go public in 2022 are now all in limbo patiently waiting for the markets to bounce back before attempting to go public.
We now have a build-up of VC backed companies with $1B+ valuations looking to go public.
I suspect that many of these companies may not be ready for the public markets. In the most basic sense, a lot of these companies just do not have strong enough financials for a successful IPO in a normal market.
That’s fine of course as companies can grow into better numbers, but the potential problem may be retaining the employees through the down market. High quality talent jumps to fast growing startups in promises of equity and massive exit potentials. In a way 2021 may have created a false expectation for a lot of these employees.
When they see their companies delaying IPO plans for another year or two, a natural instinct for many may be to flock to greener pastures. This is a pre-IPO company’s biggest problem - losing high quality talent in that limbo phase.
A lot of these pre-IPO companies are in tough positions right now and I imagine a lot may not ever make it out to the public markets.