Link to Original Post: Wrestling with the big question
It’s almost certainly the biggest question on everyone’s minds: when will the exit drought end? LPs, in particular, are desperate to see the flood gates open with a wave of distributions. Alas, the consensus of venture managers we spoke with is that the tide is going to stay out for a while longer.
Senior reporter David Bogoslaw talked to 18 venture capitalists for a series of stories about what they expect to see in 2024 with regard to exits, fundraising and valuations. Some of them believe M&A exits will become more viable, but most don’t see the IPO market rebounding meaningfully until late this year or more likely 2025. (Read: How long will the exit drought continue?)
Our informal polling jibes with the uncertainty we’re hearing from broader surveys. In the Kauffman Fellows’ 2024 VC Trends & Predictions Survey, about a third of the 239 firms polled said “2024 will not be a good year for exits and liquidity.” Nearly half of those surveyed anticipate an increased focus on M&A, while just over 4 percent foresee greater interest in IPOs and 11 percent expect a balance between the two categories, Kauffman reported.
Publicly traded equities ended last year on a wave of strength after the Federal Reserve indicated in November that moderating inflation should warrant at least three interest rate cuts in 2024. But that hasn’t changed the cautiously optimistic outlook of most VCs about exits for their more mature portfolio companies over the next 12 months.
‘Cold’ forecast
New research published by Gregory Brown of the Institute of Private Capital found that the probability that the US IPO market will thaw in 2024 is only around 30 percent. IPC’s analysis noted that “even with strong recent market returns, which are a statistically strong predictor of IPO activity, there is roughly a two-in-three chance that the ‘cold’ IPO market will persist through the first half of 2024.” (IPC defined a cold market as one with an average of about five or less listings per month.)
Companies need to be slightly bigger, healthier and more mature before they are ready to go public, QED Investors co-founder, managing partner and chief investment officer Frank Rotman told Venture Capital Journal. He expects to see a handful of IPOs of good companies this year, but most others will have to wait until they “have refactored themselves and turned themselves into profitable machines that are still growing.” He expects a more significant resurgence in public listings to remain on hold until later this year or into next year.
Struck Capital is more optimistic about an IPO comeback, with founder Adam Struck citing a group of “well-positioned businesses that have used the last year to focus on more sustainable growth,” good preparation for the added scrutiny that is given to public companies.
With at least two of the leading stock indexes back at record or near-record levels, investors seeking more yield will probably be more receptive to riskier stocks like biotech. Big Pharma has proved willing to pay large premiums to acquire strategic assets, while remaining very selective and valuation-sensitive otherwise, said Richard Murphey at research firm Bay Bridge Bio.
The promise of lower, or at least stable, interest rates should also incentivize acquirers that need to rely on some form of debt financing for transactions to enter into attractive deals.
Private equity investors in recent months have been more aggressive in looking for scaled assets to buy, as well as roll-ups and consolidation of smaller ones. And more established companies with cash in their coffers that turned away from venture-backed assets in the last few years because they were too expensive now see an opportunity to pick up “great teams and technologies and get market share at a moment that may not come back again if prices go up,” said Dawn Capital partner Henry Mason.
If faster-scaling companies have traditionally stood the best chance of an exit, the constrained resources in the venture market have now opened up a less attractive exit of sorts to struggling start-ups through consolidation within verticals.
More venture fund managers will encourage their mature portfolio companies to consolidate smaller competitors that are showing real traction with customers but can’t afford to keep paying the high costs of customer acquisition and retention, Navigate Ventures founder and managing partner Ivan Nikkhoo predicted.
This Friday Letter was prepared by Lawrence Aragon and David Bogoslaw. Comments, questions, story ideas? Shoot us an email. We’d love to hear from you.