Will we see any Tech/Software IPOs in 2H 2023?

A question we’ve been getting from several of our LPs is: What is the state of Software IPOs this year?

Since the end of 2021, we have not witnessed any software Initial Public Offerings (IPOs), making it 18 months and counting since the last one. This is a notable and extended IPO drought, considering that the two previous software IPO "droughts" each lasted around six months.

  • Drought One: Occurred at the beginning of 2020 due to the impact of the pandemic. went public in December 2019 and the next software IPO was ZoomInfo in June 2020.
  • Drought Two: Took place in late 2018 and early 2019, coinciding with fears surrounding the China trade war. However, the IPO window reopened in the Spring of 2019 with PagerDuty and Zoom's public offerings. 

All of these historical droughts were approximately six months long. Comparing this to the current drought, which is around 18 months, it is evident that we are currently facing a severe IPO drought. In a typical period, we would have seen a handful of companies go public by now. These companies will eventually need to go public, but questions still remain: How will high-interest rates affect buyers’ appetite, what impact does the recent run-up of the Nasdaq (up ~40% ytd) have on these companies, and most importantly, what will the market require from a fundamental perspective to raise money? 

To better understand the last question, Jamin Ball analyzed data from the last six years on software IPOs. Three key metrics were examined: Last Twelve Months (LTM) Revenue, Revenue Growth Rate, and LTM Free Cash Flow (FCF) Margins. 

It’s interesting to see that breakdown and know that many private companies have hit or exceeded criteria number one. However, criteria two and three are lacking across many of these companies. It seems that budgets are starting to expand (helpful for criteria two). And after recent layoffs and a “push to profitability”, efficiency/scale (FCF) should start to improve making criteria three more achievable.  

Our take is that we might see 1-3 Tech IPOs later this year but it won’t match the roughly twelve we would normally see in a healthy IPO market. With a few very big names likely going public (e.g., Stripe, Databricks, ByteDance) in the next 6-9 months, many private startups straddling the line will have to make a decision: Do we go before some of these big names or do we wait? Either option has its positives and negatives. 

That’s just our hunch, we’d love to hear from you, what do you think?!

Will we see any IPOs happening this year at all? | TechCrunch

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