What's the outlook for the IPO market this year? Everyone seems to agree: It could be disappointing, or it could rebound in the second half.
And, oh -- there's SoulCycle.
SoulCycle, after all, filed for its IPO back in July, and has many of the qualities that investors like: It's profitable, it's growing, its customers are sufficiently fanatical, and it's got plenty of room to expand. With a backlog of companies looking to get out the door, SoulCycle is the one that seems to have stoked the most anticipation.
Aside from that, the only consensus is that the IPO market, at least for venture-backed IPOs, will be off to a slow start. "The IPO market for 2016 could be very weak or there could be a decent pickup," says Kathleen Smith, principal with Renaissance Capital and manager of Renaissance's IPO-focused ETFs. "Certainly at the beginning of 2016, it's going to start out fairly slowly."
Whether or not the IPO market picks up speed, and when, will depend on the overall performance of the stock market, the performance of other companies that have recently gone public, and the willingness of those companies waiting in the wings to take significant haircuts on their valuations.
"We have to start seeing some liquidity and some good exits," says Anand Sandwal, co-founder and CEO of researchers CB Insights. "People have to see some sustained goodness."
So far, that hasn't happened. Overall, IPOs that went out last year aren't trading all that well. Yes, Square, priced at $9 a share in November, well below the $15.46 a share at which it last raised money from private investors, then traded as high as $13.50 before the close of 2015. But in aggregate, says Smith, recent IPOs are trading at about eight percent below the wider market.
That's a problem for other private companies looking to get out the door. "The best performers in the market have been Amazon and Netflix," says Smith. "Why would you buy [shares in a] money-losing new company if you have those names to give you double-digit returns?"
Another issue is volatility, which also makes it harder for companies to go public. A roadshow, during which the CEO and other senior execs pitch their company to investors, generally lasts a week or a bit more. Dramatically swinging stock prices, such as those at the beginning of January, make it very hard to determine the right price for soon-to-be-issued shares.
"Generally, companies can't go on the road when there's that much volatility," says Mike Gould, a capital markets partner at PricewaterhouseCoopers. "You can't have the price be X on Monday and Y on Friday." It doesn't matter where the volatility comes from: fluctuations in Chinese currency can dash a startup's plans just as easily as supply-chain problems at home.
The result is a defensive stance among investors, and a preference for profits over growth. That means the two types of companies most likely to go public are those that are profitable and growing (again, SoulCycle), and those that need the money or the flexibility that comes with going public and either don't have big concerns about their valuations or are willing to brave them.
Square is often cited as an example of the latter, with the theory being that it wanted to get out the door before the IPO environment got any worse, and management knew a hit on valuation was the price it would pay. Square now has the ability to tap the public markets for further financing, if necessary, and is better able to use its shares as currency in acquisitions.
"They likely knew they were coming below their last private round, based on the price at which they marketed the IPO," says David Erickson, a senior fellow and lecturer in the finance department at Wharton, and a former operating partner at Bessemer Venture Partners. "Being an early public unicorn provides advantages you can't necessarily have as private company."
PureStorage, which went public in October, probably didn't perceive valuation problems with its IPO. Its most recent private round before the IPO valued it at $3 billion; the IPO, at $3.1 billion.
Many of the so-called unicorn companies probably could go public -- but, most likely, at prices they wouldn't like. In the fourth quarter of 2015, says Smith, the average IPO priced at 15 percent below the midpoint of its filing range. "That's significant," she says. And it's probably enough to convince those who don't need the cash to stay on the sideline -- at least until the wider market looks a little more bullish.