Some of the Challenges for the Rare 2023 IPO
Subscale IPOs struggle if they happen at all due to investor behavior dynamics and structural issues (not the mention the market macro)
The criteria for a company to go public over the last 10 years were pretty straightforward - reach $150-200 million in annual revenue, project $300-400m NTM revenue, demonstrate sustained +35-50% growth, and have a “clear path” to profitability. This allowed companies to get valued at 20-25x revenue upon IPO and achieve coveted $5 billion+ valuations. This mattered because public investors could get enough allocation on a 10-15% share float at that valuation to make it worth their time. Those public investors would buy shares and hopefully hold for long times (though that didn’t always happen, as Bill Gurley will tell you). This is simplistic, but you get it.
However, in the last 18 months, the dynamics of the public markets have shifted significantly. Active capital from investors looking for alpha has largely moved away from public equities into alternatives like credit and bonds. It’s rotated away from equities which have mostly dropped in value and increased in risk. Meanwhile, more passive capital focused on index investing has entered public markets, targeting larger companies with minimum of $5-10 billion market caps.
This poses a challenge for smaller tech IPOs. With the median NTM Revenue multiple now closer to 5x (thanks, Jamin), that same $300 million NTM revenue company would need to be closer to $1 billion ARR just to reach the minimum threshold of interest for passive investors. Plus they still need to demonstrate 30-40% growth to match past $5-10b expectations - 30-40% at +3x the scale! Without massive scale, many IPOs simply won't get enough demand to support their valuations. There simply isn’t institutional buyer support for subscale companies (by public standards).
So what's a founder to do in this market environment? Here are two paths forward:
Focus on hypergrowth to build massive scale quickly. Many VCs will push for this route. You’ll raise a ton of money, dilute yourself most likely (maybe unless you’re AI right now), and if things don’t work out, you’ll end up with a TechCrunch article about your layoffs.
Or, you can double down on fundamentals - revenue, margins, payback periods, retention, customer acquisition, growth efficiency. Build a company that can thrive standalone without perpetually fundraising. Let KPIs drive your strategy rather than arbitrary growth goals. Now that capital isn’t cheap, neither should the foundation of your company.
The economic climate has changed, but by understanding the new rules of the game, founders can still build companies ready for the public markets. The key is controlling your own destiny through smart strategic choices, rather than hoping investors - public or private - will be irrationally exuberant. This period is an opportunity to focus on what truly matters in building an enduring business.