As market volatility continues, tech companies are stuck watching from the sidelines.
Key Details
- After watching some tech companies’ shares drop as much as 60%, private companies are hesitant to enter the public market, choosing instead to wait it out.
- Today marks 238 days since a tech initial public offering (IPO) has valued over $50 million.
- The Federal Reserve’s strategy of raising interest rates to slow inflation is one of the main culprits causing the IPO scarcity.
Why it’s news
The rapidly rising rates are causing markets to slow, causing some to call for the Fed to slow down.
“The IPO and credit markets won’t clear until the Fed shows some signs of peak hawkishness,” said Great Hill Capital chairman Thomas Hayes.
If the interest rate hikes slow down, the market can better adjust to the changes, allowing for more IPOs to enter the market.
Until the market volatility slows, it seems that many private companies will hold off on going public.
Companies like payment provider Stripe, self-driving tech company Mobile, and grocery delivery service Instacart are all holding off on IPOs that had been planned for this year or earlier.
Backing up a bit
IPOs have raised $5.1 billion this year compared to the $33 billion typically raised by this point in the year. IPOs haven’t suffered this much since 2009.
This could be the worst year for raising money in IPOs since 1995 when research firm Dealogic started tracking the numbers, The Wall Street Journal reports.
Newer companies are pausing plans until the market regulates, causing them to burn through cash in the meantime.
Inflation, higher interest rates, and war in Ukraine have dragged down the performance of the stock market. Just last year, the market saw the best 18 months of U.S. IPOs, promoting hundreds of companies to prepare to go public.
Fewer companies going public normally signals bad news for the economy and investors. Quite often, when there is negative sentiment about the economy, companies delay plans for going public.
Companies that decide to go public this year may need to plan on halving their valuations, The Wall Street reports.
