The September public debuts of Arm, Klaviyo and Instacart signaled the public markets could be opening up again. After all, these were the largest tech IPOs in more than 18 months.

However, since these debuts, zero venture-backed companies in the U.S. markets have listed above a billion dollars. And Klaviyo and Instacart are down from their IPO price by 22% and 33%, respectively, as of Dec. 31, 2023, around three months since going public.

Arm, which was acquired by SoftBank in 2016 and then taken public, is by contrast 40% above its IPO price.

“I am certainly less bullish right now on a robust IPO market in 2024,” said Ran Ben-Tzur, a partner at legal firm Fenwick & West, an adviser to technology and life sciences companies planning to list on the public markets.

Growth vs. profitability

Close to 1,500 private companies with valuations of $1 billion or more are currently on The Crunchbase Unicorn Board, with the majority of those valuations accrued in 2021 when the market peaked.

While those values might not hold in the current markets, this is not the only showstopper for public market ascension. Many companies planning to go public will need to show a path to profitability as well as revenue growth.

“Companies are being more thoughtful now about that tradeoff between growth and profitability,” Ben-Tzur said.

However, it is tricky, he said. “Especially for high-growth technology companies, people are investing in that growth.”

The cost of capital is very high currently, he said. “So companies are trying to extend out runway and put themselves in the situation where they’re able to control their own destiny as opposed to having to go back out and raise capital,” he said.

However, “ultimately value creation is driven by revenue growth, it’s not driven by profitability. Profitability comes over time,” said Ben-Tzur.

In the cloud

The Bessemer Cloud Index of public companies is a good reference for public tech stock revenue growth and revenue valuation multiples.

The index shows cloud revenue — as one would expect — slowed in 2022 but also continued to slow even more so in 2023.

In January 2022, the average revenue growth for public SaaS companies was 37.5%. A year later, average revenue growth was down to 29%. And by December 2023, average revenue growth was down a further 10 percentage points to 18.9%.

While revenue growth rates have slowed, valuation revenue multiples have also come down, which all leads to depressed values.

Revenue multiples were 13.4x in January 2022. In January 2023 they were down more than 100% at 5.7x. Since the beginning of last year, even as revenue growth slowed, average valuation multiples improved a bit to 7.2x as of December 2023.

“The bar is higher,” said Brittany Skoda, global head of software banking at Morgan Stanley.  “Multiples are lower than they were in 2021. So companies on balance are going to need to be bigger, to be an appropriate market cap in the public context.

“You’re going to see companies probably either decide to wait longer to get public — into the hundreds of millions of dollars of revenue with profits or a clear path to profits, and/or consider M&A,” she said.

Meanwhile, the Nasdaq composite index is at its highest value in 18 months. That’s even as some of the largest tech listings since 2021 are still below water.

“We are seeing more companies  start to ask us about IPO prep,” said Ben-Tzur, while a year and a half ago no one was interested at all. “But it’s more around 2025 than 2024.”

“I don’t think there’s going to be some huge snowball of activity in the IPO markets in the near-term — more flurries over the next 12 months,” said Skoda.

Illustration: Dom Guzman