By Matt Whittaker, Contributor
THERE’S A PARTICULAR artfulness required for companies that want to raise money by selling shares in an initial public offering.
A company must judge whether there is an appetite for it based on its business model, past performance and growth prospects. It also has to gauge whether conditions are right in the broader market.
These days, the market’s appetite is basically nonexistent. That’s because the coronavirus pandemic sweeping across the globe has ushered in an era of tremendous uncertainty as no one knows exactly how long the pandemic will last or how much it will hurt the economy.
The unknowns triggered a steep sell-off in stocks, punctuated by large bounces. The ups and downs have continued even as equities have halted their steep decline in recent days. Volatility makes it hard to predict how the market might value a company on any given day.
“Volatility in the stock market is kryptonite to the IPO market because you can’t get a sense of where to price the stock,” says Scott Rostan, founder and CEO of Training The Street, a New York-headquartered company that teaches courses on analyzing and valuing companies. “Buyers and sellers are going to be very tentative.”
One of the reasons the stock market has declined so much during the pandemic is that the uncertainty about how bad things could get has sapped appetite for riskier investments. IPOs are even riskier for investors than stocks that are already trading on exchanges because private companies don’t have a track record of making their financial history public.
As investors have seen their portfolios plummet, their focus has been on trying to maintain the value of what they own rather than taking on the new risk that investing in IPOs would entail, says Reena Aggarwal, professor of finance at Georgetown University.
“When your house is on fire, you don’t think about remodeling,” Rostan says.
Last year was a mixed bag for the so-called unicorns of the market – private startups valued at more than $1 billion.
But the coronavirus pandemic is such a game-changer that last year’s IPO market isn’t comparable with the current one, Rostan says.
“The IPO market is going to be challenging for pretty much anyone,” he says, even for food and grocery delivery companies like Postmates, Doordash and Instacart that are likely benefiting from increased demand as people stay home, Rostan says. “Those companies will probably be able to eventually get their IPOs off the ground sooner than companies that don’t perform well in a stay-at-home environment.”
He adds: “Anything travel-related right now is going to be a hard sell, even for a unicorn-like Airbnb.”
There are a few other potential IPO companies that are potentially benefiting from the computer-based environment that is crucial for businesses continuing to function during the pandemic. This includes Snowflake, a cloud-based data warehousing company; Asana, which makes workplace team collaboration software; and Wish, an e-commerce company with a focus on unbranded, inexpensive items that seeks to connect buyers directly to manufacturers.
Even for companies that may be outperforming during the coronavirus, Aggarwal still doesn’t think now is the time for them to go public. “The company might be OK, but the demand side is going to be lacking,” she says.
Rostan sees three phases for the IPO market as the pandemic plays out.
In the current “red alert” phase, during which many people have been ordered to stay at home, broadly disrupting the economy, he said he would be surprised if any company decided to go forward with an IPO, although there could be exceptions to the rule.
Later, when testing is widespread and people are less restricted, the IPO window will open back up. But in that phase, only sought-after companies with good business models, strong financial track records and demonstrable growth prospects would be successful.
After that, in the third phase of whatever the new normal ends up being after the pandemic passes, Rostan sees that window opening wider and more companies being able to come to the public market trough.
Ed Zimmerman, chair and co-founder of the Tech Group at New York-based law firm Lowenstein Sandler, where he represents tech startups, growth companies and the venture capital and growth equity funds that back them, doesn’t think the market will see an IPO window open before fall.
In addition to economic and stock market worries, remote working makes it harder to get teams of investment bankers and company representatives together in person to hash through the process of taking a company public, he says.
Zimmerman says it’s hard enough to do an IPO even when people are feeling good about the future, drawing a sharp contrast with the economy’s current uncertainty.