Many venture investors, and perhaps their LPs, were hoping for a return to IPOs in 2024, but that hasn't happened and is unlikely to happen in the next two months.
Nasdaq CEO Adena Friedman is not surprised.
On paper, public markets are experiencing a great year, with the S&P 500 up about 22%, but there's more to this story than just the headline numbers, Friedman said at Axios' BFD event on Tuesday. He said it was meaningful. Friedman said S&P understandably puts too much emphasis on large-cap stocks. And thanks to the strength of companies like Apple, Nvidia, and Microsoft, this corporate index performed well.
But not all areas of the public market are having a strong year, and companies with low valuations are really struggling.
“It’s a bit of a tale of two cities,” Friedman said. “Large-cap stocks are doing really well, and as you can see in the S&P 500, large-cap valuations are up about 10%. But if you look at the small-cap index, they're actually down 10%. ”
Although the exact definition of small-cap stocks varies, there is general agreement that they refer to companies valued at less than $2 billion, which represent a significant portion of today's late-stage startups. So this is a data point that shows investors aren't that interested in them.
Friedman said many late-stage startups aren't fully prepared for a successful IPO. Companies want to be in very strong financial shape before their debut, but many may still not be after a tougher 2022 and 2023. And in this atmosphere of rising interest rates, companies still burning in the red could face a particularly harsh reaction from retail investors if they provide cash to support growth.
“They want to perform really well for 12 months before they start thinking about coming out,” Friedman said. “The cost of capital environment definitely means that companies that rely on capital to grow their businesses are trading at a discount.”
It's not a bad thing that private markets have become safer places for companies. The secondary market is particularly active throughout the year, and when investors buy stock in privately held companies, they often do so in company-approved transactions. This has enabled late-stage companies to get the liquidity they need for their investors and employees. So I don't think venture capitalists are actually pushing their portfolio companies toward the public market in these less-than-ideal circumstances. As an example, telemedicine provider Ro was last valued at $6.6 billion when it raised funding in 2022. Just an hour before Friedman took the stage, Ro CEO Zack Reitano said the benefits of remaining a private company are increasing.
Friedman said he thinks IPOs will start to come back strong in 2025. He added that some recent biotech IPOs have been positive, showing there is appetite for these young companies. For example, Tempus AI debuted successfully in June. Raised $410 million. Vicara Therapeutics did the same in September, raising $362 million, among other things. However, despite Friedman's optimistic view, some of the biotech companies that went public this year did not maintain their stock prices on the day of their IPOs.
She also naturally thinks there is a good reason for a company to go public because it spreads wealth beyond just a few individual investors.
There were 14 venture-backed IPOs in the U.S. through the third quarter of this year, according to PitchBook data. So far in 2024, the total has been 51, and this year's total may not even reach last year's total of 86 or 2022's total of 81.
Momentum seems to be building even further for the 2025 IPO market, with names like Chime, Klarna, and CoreWeave all appearing to be moving in that direction.