The IPO market has become dormant once more. Here's the reason for the change in outlook.

It’s quiet out there in IPO land — very quiet.

Before the holiday season begins, there is typically a surge of large IPOs seeking to go public during the weeks leading up to Thanksgiving.

Don Short, head of venture equity at InvestX, advised me that whatever should be happening between now and the end of the year should be occurring immediately.

Except, nothing is happening.

According to Matt Kennedy from Renaissance Capital, companies that are bad can't go public, and companies that are good don't want to go public in a bad market.

The recent stock market performance in October was poor, interest rates have been rising, after-market performances from recent IPOs have been disappointing, and the possibility of lower valuations is causing many IPO candidates to reconsider or postpone their debuts.

The steady rise in the 10-year Treasury yield was a particular deal killer.

According to Greg Martin from Rainmaker Securities, the IPO market was a "big wet blanket."

Companies delaying IPOs

It is reported that Waystar has decided to delay its IPO until December or 2024, instead of launching its roadshow last week.

In anticipation of a potential IPO next year, Panera Bread announced that it was letting go of 17% of its corporate workforce last week, as reported by the Wall Street Journal.

Others still interested in an IPO may have to take very large haircuts.

Klarna, a buy now, pay later firm often discussed as an IPO candidate, informed CNBC that it has no immediate plans to go public. The company's last funding round occurred at a valuation of $6.7 billion, which represented an 85% reduction from its previous valuation of approximately $46 billion.

Shein, a Chinese fast-fashion giant, has not yet decided on the timing and valuation of an IPO, but sources close to the company's plans revealed that it is aiming for a valuation of $80 billion to $90 billion. However, the most recent funding round in May valued the company at $66 billion.

In contrast to most years, big IPOs are typically launched in November and December.

In November 2021, Rivian, the largest IPO of the year, priced on the 9th and began trading the following day. Hertz raised $1.3 billion, Braze raised $500 million, Sweetgreen raised $364 million, and Allbirds raised $303 million.

In December 2020, Airbnb went public and raised $3.5 billion. The following day, Doordash raised $3.4 billion. Prior to that, in November 2020, Sotera Health raised $1.1 billion and Miravai Life Sciences raised $1.6 billion.

The year-end IPO gold rush failed in 2022 and is doing so again in 2023.

In 2023, 96 IPOs have raised $18.8 billion, surpassing the $7.7 billion raised in 2022, which was the worst year for IPOs in decades. A typical year should see at least $50 billion raised.

Recent IPOs aren’t helping

The recent IPOs have not performed well, which did not help the situation.

According to Short, after Instacart went public in September, everyone who had lined up after it did so pulled their deal, causing things to go quiet.

After dipping below its debut price in early trading Thursday, Arm is currently trading near its offering price, while three of the biggest IPOs of the year are trading below their offering prices.

Largest IPOs, 2023(from offering price)

According to Renaissance Capital, the flat market has decreased by 13%, 8%, and 10%.

The marketing automation company, which went public in September, is currently trading 8% below its offering price of $30 after reporting earnings on Tuesday.

The restaurant chain went public in June at $22, but its stock is currently trading at $31, which is above its initial offering price. However, the stock reached a high of $57 in the month following its public debut, meaning that most of the original buyers are now underwater at Wednesday's price of $31.

The basket of 60 largest IPOs in the past two years has dropped 17% from its July high to October low, while S&P experienced a similar trajectory but wasn't as bad.

Some companies may still go public

The market is not completely closed.

December should not be dismissed. If the current rally continues, we may see increased activity," Kennedy stated. "Companies aim to go public when they anticipate the market will rise.

There are some small firms still in the pipeline.

BKV, a U.S. natural gas producer, has updated its prospectus, indicating its intention to proceed with its $100 million IPO.

In mid-October, Smith Douglas, the homebuilder that filed for a $100 million IPO in September, updated its prospectus.

This week, American Healthcare REIT, which filed in September 2022, updated its financials and added an additional underwriter (Morgan Stanley).

Here’s another problem: AI

As time passes, some older IPO candidates like Reddit and Stripe become less captivating.

AI is currently the most exciting field, but none of the companies are ready to go public yet," Short stated. "Despite many names still burning cash, there is limited capital available for anything other than AI.

Arm is one of the few IPOs that hasn't experienced a significant decline.

"The category of anything related to AI is distinct, and Arm is receiving a positive impact as a result," Short stated. On Wednesday evening, Arm reported its earnings as a public company. Despite this, its shares decreased by approximately 7% in trading the following day after providing a subpar forecast.

Tough choices for IPO candidates

IPO candidates have three options: go public with a substantial reduction, remain private with a reduction, hope their venture capital source continues to fund them, or merge or go out of business.

Greg Martin, a leading private platform for trading pre-IPO companies, told me that the best-positioned companies are those who can fund their operations from their own cash flow. However, this group is not very large.

Private financing markets are in a worse state than public financing markets, so it's crucial not to run out of cash at the moment, according to Martin. He also mentioned that private sales of stock are currently fetching much lower prices compared to two years ago.

Many tech unicorns are in a precarious position due to their high valuations.

Martin stated that unicorns are beginning to die due to the presence of lower quality unicorns with negative EBIDTA [cash flow], and there is little demand for them in the public markets, making the M&A route increasingly likely for many companies.