Are IPOs an Endangered Species?

Are IPOs an Endangered Species?

The economy is on its way up again, they insist! Jobs are on the rise, and markets are better than they’ve ever been. So now seems like a great time to invest in promising startups, right? Apparently not. The market for IPOs has fallen 56% since last year, and is currently the lowest it’s been in a long time.

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The Risks of Sticking Your Neck Out

An Initial Public Offering is the first time a privately traded company makes its stocks available to the public. This can be done by companies of any size or age, but it’s particularly popular with relatively new startups. After receiving their first round of funding from venture capital to build their framework, the move to take a company public can provide it with the additional money it needs to grow and expand.

The problem is these stocks are often pretty risky. Since it’s the first time the company has been traded publicly, you can’t analyze its history to get an idea of how it will do. It might be doing well as a privately traded company, but taking it public also generally means that the organization is about to go into a state of transition. Will they survive the planned changes and expansions that this IPO is supposed to fund?

Because of this trepidation by investors, IPOs are also a significant risk for the startups themselves. Often shares need to be offered at a discount, to garner interest in lieu of actual, demonstrable company growth. Private companies have fewer costs and more independence as well. They don’t have to worry that any single decision, and how it’s perceived by the public, will affect stock prices.

The Decline of IPOs

What all this means is these are difficult times for startups. Fewer and fewer are choosing to go public in the current economic climate. Even so-called “tech unicorns,” startups valued at $1 billion or more, are holding back. Hugely profitable companies, like the rideshare app Uber, valued at around $68 billion, are remaining private. There’s plenty of money to be made, but the fear is that money may dry up when the company is offered to the public. The markets are currently doing well, but past experience and current instabilities lead experts to fear things could turn on a dime, causing these tech unicorns to lose everything.

So instead of an IPO, many of these companies are finding alternate ways of raising money to take their next big step, though many of these strategies are a risk in and of themselves. Attracting venture capital for companies in their later stages is more difficult than for ones just being formed. Therefore, some unicorns are taking out loans, and otherwise going into debt, in order to get the funds they need. Though this has the potential to impair their bottom line it’s still less risky than taking their company public and losing everything.

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So even though the economy appears to be stable, if you look closely, there are still significant problems. Both execs and investors are too nervous to back new businesses. Even as the stock market improves hardly any startups want to risk the exposure of becoming publicly traded. This points to an overall instability beneath the surface. If you have money of your own invested in the markets, you’d be wise to take heed.