The IPO Mirage of 2021

Cycles Matter

by Jeremy Baksht Azafran Director of Investments


With every extended bull market it is common to see a boom in IPO activity. 2021 has been an incredibly active year for IPOs with 433 companies raising on the Nasdaq and NYSE with a value of over $300 billion raised. This activity is considerably higher than the $168 billion issued in 2020.


The disappointment with this seemingly exciting activity is that 60% of issues are below their offer price. Further the employees and other insiders at these companies are seeing paper gains vanish before they have gotten to sell as most issues have a post-IPO lock-up period, which typically lasts until six months after the offering.


Across the tech sector, rising inflation and the threat of higher interest rates are battering companies that will continue to need to access more capital to subsidize growth, particularly the thirsty B2C and D2C markets that require extensive marketing budgets to win market share. When the Fed was printing money via QE and accommodative this was less of an issue. As the market headwinds mount and yet another new strain of Covid spooking investors we have seen a flight to safety in large cap and established tech giants.


CNBC reviewed 55 pure tech companies that debuted in the US in 2021 through IPO, special purpose acquisition company (SPAC) or direct listing. Only one of them, GlobalFoundries is off less than 20% off its high price. That means the rest are in bear market territory, typically defined as a drop of 20% or more from their peak. Even worse, 23 of those companies have lost half or more of their value since reaching their highs, including Robinhood, which has plummeted 70% from its top in early August, and LegalZoom, has plunged 55% since peaking in July.


This year, Roblox, Coinbase, Squarespace, ZipRecruiter, Amplitude and Warby Parker debuted via direct listings which is a bit unconventional as bankers are not involved in pricing and managing order books with shares free floating at issue primarily purchased by hedge funds and other short term holders. These shares are each down between 20% and 50% from their highs. Direct listings don’t have lockups so employees have at least had the ability to sell their vested stock on the open market from day one, cashing in on at least some of their gains.


Tech SPACs have been just as problematic for public investors as IPOs and direct listings. Auto insurer Metromile, whose technology allows drivers to pay by the mile rather than a monthly fee, has seen the steepest plunge of the IPO group, dropping 85% from its high in February, shortly after the SPAC merger was completed. Among other SPAC listings, neighborhood social network Nextdoor is 47% off its November high, and online lender SoFi has dropped 44% in 10 months.


We also are witnessing a big crackdown from Beijing that is causing headaches for companies like TikTok’s owner ByteDance. ByteDance is the most valuable unicorn on the planet, worth $140 billion, but it will have a tough time IPO’ing in the West. Chinese ride-sharing app Didi has struggled since it went public. It’s rumored that regulators in Beijing may now want Didi to delist from the NYSE because of worries about data security.


Investors have turned jittery over the past few months, and the massive increase in the number of companies going public has flooded the market with new supply. The newly hawkish Federal Reserve and the ever-evolving virus may cause all US equities to see “a shallow bear market”. Cycles matter and companies going public particularly with inexperienced public market leadership often find the pressures of being public are more challenging than staying private longer. It is likely that founders may seek a bear hug acquisition from a more established public company that offers less scrutiny and resources like established distribution channels, R&D budgets and SG&A / corporate scaffolding.