The tech IPO market collapsed in 2022, and next year doesn’t look much better
The Nasdaq MarketSite in New York.
Michael Nagle | Bloomberg | Getty Images
Following a record-smashing tech IPO year in 2021 that featured the debuts of electric car maker Rivian, restaurant software company Toast, cloud software vendors GitLab and HashiCorp and stock-trading app Robinhood, 2022 has been a complete dud.
The only notable tech offering in the U.S. this year was Intel’s spinoff of Mobileye, a 23-year-old company that makes technology for self-driving cars and was publicly traded until its acquisition in 2017. Mobileye raised just under $1 billion, and no other U.S. tech IPO pulled in even $100 million, according to FactSet.
In 2021, by contrast, there were at least 10 tech IPOs in the U.S. that raised $1 billion or more, and that doesn’t account for the direct listings of Roblox, Coinbase and Squarespace, which were so well-capitalized they didn’t need to bring in outside cash.
The narrative completely flipped when the calendar turned, with investors bailing on risk and the promise of future growth, in favor of profitable businesses with balance sheets deemed strong enough to weather an economic downturn and sustained higher interest rates. Pre-IPO companies altered their plans after seeing their public market peers plunge by 50%, 60%, and in some cases, more than 90% from last year’s highs.
In total, IPO deal proceeds plummeted 94% in 2022 — from $155.8 billion to $8.6 billion — according to Ernst & Young’s IPO report published in mid-December. As of the report’s publication date, the fourth quarter was on pace to be the weakest of the year.
With the Nasdaq Composite headed for its steepest annual slump since 2008 and its first back-to-back years underperforming the S&P 500 since 2006-2007, tech investors are looking for signs of a bottom.
But David Trainer, CEO of stock research firm New Constructs, says investors first need to get a grip on reality and get back to valuing emerging tech companies based on fundamentals and not far-out promises.
As tech IPOs were flying in 2020 and 2021, Trainer was waving the warning flag, putting out detailed reports on software, e-commerce and tech-adjacent companies that were taking their sky-high private market valuations to the public markets. Trainer’s calls appeared comically bearish when the market was soaring, but many of his picks look prescient today, with Robinhood, Rivian and Sweetgreen each down at least 85% from their highs last year.
“Until we see a persistent return to intelligent capital allocation as the primary driver of investment decisions, I think the IPO market will struggle,” Trainer said in an email. “Once investors focus on fundamentals again, I think the markets can get back to doing what they are supposed to do: support intelligent allocation of capital.”
Lynn Martin, president of the New York Stock Exchange, told CNBC’s “Squawk on the Street” last week that she’s “optimistic about 2023” because the “backlog has never been stronger,” and that activity will pick up once volatility in the market starts to dissipate.
Hangover from last year’s ‘binge drinking’
For companies in the pipeline, the problem isn’t as simple as overcoming a bear market and volatility. They also have to acknowledge that the valuations they achieved from private investors don’t reflect the change in public market sentiment.
Companies that were funded over the past few years did so at the tail end of an extended bull run, during which interest rates were at historic lows and tech was driving major changes in the economy. Facebook’s mega IPO in 2012 and the millionaires minted by the likes of Uber, Airbnb, Twilio and Snowflake recycled money back into the tech ecosystem.
Venture capital firms, meanwhile, raised ever larger funds, competing with a new crop of hedge funds and private equity firms that were pumping so much money into tech that many companies were opting to stay private for longer than they otherwise would.
Money was plentiful. Financial discipline was not.
In 2021, VC firms raised $131 billion, topping $100 billion for the first time and marking a second straight year over $80 billion, according to the National Venture Capital Association. The average post-money valuation for VC deals across all stages rose to $360 million in 2021 from about $200 million the prior year, the NVCA said.
Those valuations are in the rearview mirror, and any companies who raised during that period will have to face up to reality before they go public.
Some high-valued late-stage startups have already taken their lumps, though they may not be dramatic enough.
Stripe cut its internal valuation by 28% in July, from $95 billion to $74 billion, the Wall Street Journal reported, citing people familiar with the matter. Checkout.com slashed its valuation this month to $11 billion from $40 billion, according to the Financial Times. Instacart has taken a hit three times, reducing its valuation from $39 billion to $24 billion in May, then to $15 billion in July, and finally to $13 billion in October, according to The Information.
Klarna, a provider of buy now, pay later technology, suffered perhaps the steepest drop in value among big-name startups. The Stockholm-based company raised financing at a $6.7 billion valuation this year, an 85% discount to its prior valuation of $46 billion.
“There was a hangover from all the binge drinking in 2021,” said Don Butler, managing director at Thomvest Ventures.
Butler doesn’t expect the IPO market to get appreciably better in 2023. Ongoing rate hikes by the Federal Reserve are looking more likely to tip the economy into recession, and there are no signs yet that investors are excited to take on risk.
“What I’m seeing is that companies are looking at weakening b-to-b demand and consumer demand,” Butler said. “That’s going to make for a difficult ’23 as well.”
Butler also thinks that Silicon Valley has to adapt to a shift away from the growth-first mindset before the IPO market picks up again. That not only means getting more efficient with capital, showing a near-term path to profitability, and reining in hiring expectations, but also requires making structural changes to the way organizations run.
For example, startups have poured money into human resources in recent years to handle the influx in people and the aggressive recruiting across the industry. There’s far less need for those jobs during a hiring freeze, and in a market that’s seen 150,000 job cuts in 2022, according to tracking website Layoffs.fyi.
Butler said he expects this “cultural reset” to take a couple more quarters and said, “that makes me remain pessimistic on the IPO market.”
Cash is king
One high-priced private company that has maintained its valuation is Databricks, whose software helps customers store and clean up data so employees can analyze and use it.
Databricks raised $1.6 billion at a $38 billion valuation in August of 2021, near the market’s peak. As of mid-2021, the company was on pace to generate $1 billion in annual revenue, growing 75% year over year. It was on everybody’s list for top IPO candidates coming into the year.
Databricks CEO Ali Ghodsi isn’t talking about an IPO now, but at least he’s not expressing concerns about his company’s capital position. In fact, he says being private today plays to his advantage.
“If you’re public, the only thing that matters is cash flow right now and what are you doing every day to increase your cash flow,” Ghodsi told CNBC. “I think it’s short-sighted, but I understand that’s what markets demand right now. We’re not public, so we don’t have to live by that.”
Ghodsi said Databricks has “a lot of cash,” and even in a “sky is falling” scenario like the dot-com crash of 2000, the company “would be fully financed in a very healthy way without having to raise any money.”
Snowflake shares in 2022
CNBC
Databricks has avoided layoffs and Ghodsi said the company plans to continue to hire to take advantage of readily available talent.
“We’re in a unique position, because we’re extremely well-capitalized and we’re private,” Ghodsi said. “We’re going to take an asymmetric strategy with respect to investments.”
That approach may make Databricks an attractive IPO candidate at some point in the future, but the valuation question remains a lingering concern.
Snowflake, the closest public market comparison to Databricks, has lost almost two-thirds of its value since peaking in November 2021. Snowflake’s IPO in 2020 was the largest ever in the U.S. for a software company, raising almost $3.9 billion.
Snowflake’s growth has remained robust. Revenue in the latest quarter soared 67%, beating estimates. Adjusted profit was also better than expectations, and the company said it generated $65 million in free cash flow in the quarter.
Still, the stock is down almost 20% in the fourth quarter.
“The sentiment in the market is a little stressed out,” Snowflake CEO Frank Slootman told CNBC’s Jim Cramer after the earnings report on Nov. 30. “People react very strongly. That’s understood, but we live in the real world, and we just go one day at a time, one quarter at a time.”
— CNBC’s Jordan Novet contributed to this report.
Driverless WeRide robotaxis for Uber.
Courtesy: Uber
Uber on Wednesday rolled out fully driverless rides in its fourth market, launching the service in Abu Dhabi in partnership WeRide, a Chinese autonomous vehicle company.
The ride-hailing company said the launch in the United Arab Emirates capital represents the first driverless robotaxi service in the Middle East. In the U.S., Uber already offers robotaxi services in Austin, Phoenix and Atlanta through Alphabet’s Waymo.
Riders in Abu Dhabi can book a WeRide robotaxi when requesting an UberX or Uber Comfort ride, the ride-hailing company said.
WeRide, which is listed on the Nasdaq, formed its partnership with Uber in September 2024 and began offering autonomous rides with an operator on board in Abu Dhabi last December. Uber and WeRide also debuted robotaxi rides with a safety operator on board in Riyadh, Saudia Arabia, in October. In May, Uber said it plans to roll out the WeRide service to 15 more cities, including in Europe, over the next five years.
In recent years, Uber has bet big on autonomous vehicle technology through partnerships.
Uber started offering a robotaxi service in Austin and Atlanta earlier this year, and in Phoenix in late 2023. In July, the company landed a six-year robotaxi deal with electric vehicle maker Lucid and AV startup Nuro.
WeRide, meanwhile, has launched full driverless robotaxi services in China’s Beijing and Guangzhou, according to its website.
Uber has not said how it splits revenue from robotaxi rides with its partners.
Competitors have also readily adopted the technology, with Lyft announcing a deal with Waymo in September to launch robotaxis in Nashville next year.
Uber said the driverless vehicles in Abu Dhabi will operate in certain areas of Yas Island. Riders can boost their chance of a robotaxi drive by selecting the autonomous option. On-board support is available during the ride through the app and an in-vehicle tablet.
WATCH: WeRide CEO: We are using both Tesla and Waymo’s approach to scale robotaxi operations
Amazon’s new MK30 Prime Air drone is displayed during Amazon’s “Delivering the Future” event at the company’s BFI1 Fulfillment Center, Robotics Research and Development Hub in Sumner, Washington on Oct. 18, 2023.
Jason Redmond | AFP | Getty Images
Amazon is facing a federal probe after one of its delivery drones downed an internet cable in central Texas last week.
The probe comes as Amazon vies to expand drone deliveries to more pockets of the U.S., more than a decade after it first conceived the aerial distribution program, and faces stiffer competition from Walmart, which has also begun drone deliveries.
The incident occurred on Nov. 18 around 12:45 p.m. Central in Waco, Texas. After dropping off a package, one of Amazon’s MK30 drones was ascending out of a customer’s yard when one of its six propellers got tangled in a nearby internet cable, according to a video of the incident viewed and verified by CNBC.
The video shows the Amazon drone shearing the wire line. The drone’s motor then appeared to shut off and the aircraft landed itself, with its propellers windmilling slightly on the way down, the video shows. The drone appeared to remain in tact beyond some damage to one of its propellers.
The Federal Aviation Administration is investigating the incident, a spokesperson confirmed. The National Transportation Safety Board said the agency is aware of the incident but has not opened a probe into the matter.
Amazon confirmed the incident to CNBC, saying that after clipping the internet cable, the drone performed a “safe contingent landing,” referring to the process that allows its drones to land safely in unexpected conditions.
“There were no injuries or widespread internet service outages. We’ve paid for the cable line’s repair for the customer and have apologized for the inconvenience this caused them,” an Amazon spokesperson told CNBC, noting that the drone had completed its package delivery.
The incident comes after federal investigators last month opened a separate probe into a crash involving two of Amazon’s Prime Air drones in Arizona. The two aircrafts collided with a construction crane in Tolleson, a city west of Phoenix, prompting Amazon to temporarily halt drone deliveries in the area.
For over a decade, Amazon has been working to realize founder Jeff Bezos’ vision of drones whizzing toothpaste, books and other goods to customers’ doorsteps in 30 minutes or less. The company began drone deliveries in 2022 in College Station, Texas, and Lockeford, California.
But progress has been slowed by a mix of regulatory hurdles, missed deadlines and layoffs in 2023 that coincided with broader cost-cutting efforts by Amazon CEO Andy Jassy.
The company has previously said its goal is to deliver 500 million packages by drone per year by the end of the decade.
The hexacopter-shaped MK30, the latest generation of Amazon’s Prime Air drone, is meant to be quieter, smaller and lighter than previous versions.
Amazon says the drones are equipped with a sense-and-avoid system that enables them to “detect and stay away from obstacles in the air and on the ground.” The company recommends that customers maintain “about 10 feet of open space” on their property so drones can complete deliveries
The company began drone deliveries in Waco earlier this month for customers within a certain radius of its same-day delivery site who order eligible items weighing 5 pounds or less. The drone deliveries are supposed to drop packages off in under an hour.
Amazon has brought other locations online in recent months, including Kansas City, Missouri, Pontiac, Michigan, San Antonio, Texas, and Ruskin, Florida. Amazon has also announced plans to expand drone deliveries to Richardson, Texas.
Walmart began offering drone deliveries in 2021, and currently partners with Alphabet’s Wing and venture-backed startup Zipline to make drone deliveries in a number of states, including in Texas.
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