The first half of 2021 broke a record when it comes to the amount of money raised in initial public offerings (IPOs). Will that record pace continue for the rest of the year? And what should private company CEOs do about the booming demand for IPO shares?
Here are my quick answers: My best guess is that 2021 will be a record year for IPOs and your response should depend on your goals and where you are in the four stages of scaling.
Why 2021 Will Be a Record Year for IPOs
Amazingly, in the midst of a pandemic, 2020 was a record year for IPOs. In the first half of 2021, the U.S. IPO market surpassed that record-breaking amount -- raising over $190 billion, according to the Wall Street Journal.
More than half the funds raised were for special-purpose acquisition companies (SPACs). SPACs are a sure sign of excess in our capital markets. That's because they are publicly traded blank-check companies.
They go public -- usually at about $10 a share -- and must find a private company to merge with in 24 months. If they do not, the SPAC sponsors have to give back the money they raised. If they do consummate a merger, the sponsors typically raise more money and get a very low price on the shares of the private company. Then the SPAC takes on the identity of the formerly merged company.
SPACs are especially helpful for companies with no revenue -- such as makers of electric vehicles. That's because unlike regular IPOs, they can provide investors forecasts of optimistic growth -- an example of this is Lucid Motors, about which I wrote in February.
This discussion of SPACs is important in forecasting IPOs for the rest of 2021. That's because SPACs have generated mostly negative returns for investors, according to Bloomberglaw. This makes it likely that SPACs will raise less capital in the second half of 2021.
Nevertheless, traditional IPOs look like they will hit a record by the end of the year. As the Journal wrote, "Traditional IPOs have raised more than $85 billion and are still on track to raise the most money ever in a year. The pace of offerings isn't slowing this summer. From June through August, U.S.-listed IPOs could raise upward of $40 billion."
One IPO expert, Renaissance Capital, notes that the current level of IPOs last occurred during the dot-com boom. As Matt Kennedy, a senior market strategist there told CNBC, the IPO pace so far in 2021 "is above the full-year average for the last 10 years. We haven't seen this level of activity since the 1996-2000 time frame."
Having followed the dot-com bubble closely, Kennedy's comment strikes me as a warning that the boom times will end in an unpleasant crash. What would accelerate that crash is an abrupt loss of investor confidence in the IPO market due to lax accounting and standards for taking a company public.
What Business Leaders Should Do About It
Your ability to take advantage of the boom depends on your goals and the stage of your startup's development. If you have no interest in seeking outside investment or becoming a public company, you can treat the IPO market as a sideshow.
If you want to take your company public, you need to play by the rules set by venture capitalists and the banks that manage IPOs. Simply put, if your company is on track to at least double revenue to more than $100 million in the next few years, you are a good candidate for venture capital or other institutional investment.
To get there, you must pass through the first three of the four stages of scaling I described in Scaling Your Startup. These are:
- Winning the first customers -- which means working with early-adopter customers to co-develop your product to suit their needs. Once you've developed a product that meets their needs better than competing products, you can start winning early customers who will recommend you to others.
- Building a scalable business model -- meaning you change processes such as how you sell, market, design, build, ship, and service products so that your costs decline as you grow. Once you can generate positive cash flow and get bigger, you are ready for the the next stage.
- Sprinting to liquidity -- which implies you are taking on significant capital investment to expand your business into new regions, new groups of customers, and/or new products. At this stage, you should be able to raise venture capital now.
The fourth stage -- Running the Marathon -- is about managing a public company. If you are there now, it's all about beating quarterly investor expectations while investing in future growth opportunities.
Now could be the right time to raise capital -- make sure your company is positioned to take advantage of it.