Will the IPO Market Heat Up in 2016?

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The IPO market in 2015 was cold, to say the least. Startups chose to stay private longer, opting for private fundraising rounds.IPO market
Last year, 190 tech companies raised $25 billion from venture-capital firms and other investors. That is a lot more than what was raised in the public market. Twenty-eight tech companies had initial public offerings in 2015, raising $9.4 billion. That was down significantly from 2014.
Will the IPO market improve in 2016? Investment bankers and analysts are split on that question.
On one hand, startup “unicorns” are pricing themselves out of future private rounds and acquisitions, while investors and employees are anxious for liquidity. A “unicorn” is the term for a tech startup that reaches a $1 billion in value.

However, a significant reason for delaying IPOs in 2015 was market volatility. The market in 2016 doesn’t look like it will become any less volatile.
Tech companies had an abundance of funding available in the private sector, so they were never pushed toward raising funds through an IPO.
By choosing to delay public offerings, the private companies were able to grow under less scrutiny and regulation. However, now tech valuations in the private sector are soaring.

IPO Market and Valuations

In 2015, it seemed like a new startup was given the “unicorn” status nearly weekly.

Investors have been accustomed to seeing private valuations increase. They forget that even in the private sector, valuations can swing. We saw this for the first time when Fidelity devalued its stake in Snapchat last fall.
Until these companies face the public market, these valuations are only on paper.
Will 2016 be a good year for IPOs? That will be seen largely on a case-by-case basis dependent on the previous private financing rounds of the tech companies. But there is a very serious concern that these companies with  soaring valuations in the private sector will see them tumble when they go public.

Market Volatility an Issue

Many observers are concerned about the soaring valuations of private tech companies now. But even the tech IPOs that took place 2013, 2014 and 2015 are trading below their IPO prices.
Here are a few of those companies:

  1. GoPro (NASDAQ: GPRO): -56%
  2. Etsy (NASDAQ: ETSY): -55%
  3. Lending Club (NYSE: LC): -47%
  4. Box (NYSE: BOX): -43%
  5. Twitter (NYSE: TWTR): -34.5%

Granted, Facebook (NASDAQ: FB) was a busted IPO one upon a time, but that is the exception, not the rule.
In 2016, I suspect we are going to see a increase in IPOs compared to 2015’s lackluster IPO year. But, it will not be the surge in IPOs that many bankers predicted at the end of 2015. The market is still too volatile.
I am wary of the outcomes when these unicorns finally go public. The soaring valuations could tumble. If an IPO doesn’t price on the low range of expectations, I would steer far away from that company once it hits the secondary market.

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