What the market pause in IPOs means

There is a pause in IPOs - so what?

The public capital markets have faced a series of onslaughts in the first half of 2022 that have left it lingering in a state of high volatility. With the uncertainty of the public markets looming and valuations dropping (some would say right-setting), many companies have understandably developed cold feet over proceeding with their long awaited IPOs. 

In the first six months of 2022, only 92 companies went public in the USA and 100+ companies withdrew their intent to launch an IPO. The global markets saw IPO volumes decrease by 46%, and if the markets continue at this pace for the remainder of the year, this would result in a projected YoY decrease of almost 83%. 

With the public markets being hard hit, the private capital markets have experienced some interesting trends.

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While some segments of private capital have experienced a decline, others are proving to be insulated from the storm and, in fact, seem to be outpacing previous years’ investment. 

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Venture Capital and other Institutional investing are both also experiencing a sizeable decline in 2022. According to CB Insights, global funding to startups experienced a QoQ drop of 23% with $108.5B being invested. While the amount invested is significant, it still represents the largest quarterly percentage drop in funding in nearly a decade. Funding from the VC’s is seeing the majority go to early-stage startups (64%) with only 13% and 11% going to mid and late stage respectively. 

This trend suggests that VC’s are focusing on the long-term play and what they believe will yield them best results when the market settles, placing mid-to-late-stage companies between a rock and a hard place. Caught in a void where they seemingly aren’t attractive enough to VC and a volatile market which will not produce a successful IPO launch, mid-to-late stage companies have few avenues to explore to offer some capital and liquidity. Community rounds, or Equity Crowdfunding, can offer a solution to this mid-to-late stage desert. 

Equity crowdfunding (ECF) is a relatively new phenomenon for capital raising within the private markets and it is showing significant trends of insulation from the overarching down market, in fact, it seems to show an upward trajectory while the majority of the markets decrease - which means there is a lot of untapped potential. Since equity crowdfunding became legal for non-accredited investors in 2017 we have seen a significant rise in the Regulation Crowdfunding space with 2021 investments hitting $570M. This represents a compound annual growth rate of more than 11.5% in the five years since 2017 and, with Q1 of 2022 representing one of the largest quarters to date with $133M raised across 1,038 offerings, it shows no signs of slowing. According to research conducted by KingsCrowd, 2022 is seeing amounts on checks being written for crowdfund raises up 40% when compared to the first half of 2021. Their data shows that in June 2022, checks were nearly double the average size in June 2021.

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SEC filings for crowdfund raises (Form 1-A and Form C) at the beginning of 2022 are exceeding the pace with the beginning of 2021 - with a 2% year-over-year increase for Q1. 

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And again while Q1 outpaced last year for all filings, if you look at the trend for Reg CF raises alone, you'll see only a slight dip from last year projected. There is an appetite to raise and investors are looking for unique ways to diversify.

While other sections of the capital markets, especially the public markets and VC, are facing intense turmoil, Regulation A and Regulation CF marketed retail capital offerings remain strong. Companies are displaying high interest in tapping into this unique pool of investors to “test the waters” and raise needed capital to wait out the public market downturn so they can launch an IPO in a strong market.

The trend remains that these markets seem to be insulated from the macro-downturn and volatility, as well as still being attractive to investors that are looking for impact investing alternatives.

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Sources: Fast Company, CB Insights, Kingscrowd State of Venture 2022

Please note: The foregoing is market commentary only. Any market participant should do their own research and make informed decisions with their own advisors to make sure the particulars of their capital raise are correct for that particular issuer in that circumstance.