Opinion: The next IPO boom could be just around the corner

It would be easy to discount the results as an outlier, but there’s something interesting going on here. The data comes from a survey of 300 CEOs of companies with at least 100 employees conducted recently by hiring platform Greenhouse. For years, the strength of the FAANG stocks was a proxy for measuring the overall tech economy.  And while that’s certainly true in terms of aggregate numbers like earnings and job creation or loss, that lens is increasingly missing a growing divergence between the fortunes of big tech and those of growth tech.

Big tech has gotten so large that it has become titanic tech – and these companies now move with the dexterity of the Titanic. Companies with tens and hundreds of thousands of employees must plan in long cycles and act prophylactically. Many of the layoffs in big tech aren’t in response to actual economic pressures, but rather to the perception and risk that a recession may come. 

But as big tech companies plod along in the general direction they think the economy is going, growth tech can move like a speedboat. The CEOs surveyed in the Greenhouse report had the benefit of reacting to much more recent economic news. And while no one knows where this economy will land, the consensus is certainly much more positive now than it was a few months or even weeks ago when many of the big tech layoffs were planned and announced. Many economists now think we may even miss a recession altogether.

The startup and growth tech sectors are changing fast. Many of the lower-quality companies that rose in the wake of the massive market swell over the past few years have now gone under or are running on fumes. The stronger companies – those with real market fit, growing revenue, and meaningful innovation engines – are now well positioned for sustainable success. Many are now leaner, on the path to profitability, and opportunistically picking up tech talent that big tech has cast aside. The pre-IPO growth sector is now in a strong position versus big tech.

The implications for the prospects of the IPO market are significant. From an all-time high in 2021, IPOs fell more than 80 percent last year.  This year is off to an even slower start. But the vast majority of growth tech CEOs I speak with see an IPO not as a matter of if, but when. They’ve spent the past year getting their financial houses in order, strengthening their products, hiring advisors, and quietly doing all the things necessary to be market-ready. All the pieces are in place for a massive IPO rebound – and unlike the SPAC craze of 2020-2021, which saw many companies of questionable quality go public, the next IPO wave will be far higher quality.

But there is something holding this market back. Many of the venture capital and private equity firms that pumped endless capital into pre-IPO companies in recent years with a “growth at all costs” mantra have now done a full reversal. For months, as markets have wobbled, they’ve switched to “profitability at all costs,” exerting enormous pressure on their portfolio companies to cut costs. As valuations have sunk, these growth companies have been reticent or unable to access additional capital, making these cost savings a matter of life and death.

In some cases, this pressure to batten down the hatches has been a good thing. Warren Buffett famously said that “it’s only when the tide goes out that you learn who has been swimming naked,” and a lot of poor operating and fiscal management needed to be weeded out. That was healthy. But at this stage, the demand for austerity is causing real damage to high-quality companies. Just when they should be opportunistically recruiting available talent and investing in innovation, almost every growth CEO I speak with feels hamstrung by grueling board meetings with investors who are so focused on nickel and diming that they lose sight of the big picture. A prerequisite for a public capital market renaissance is returning private capital to a happy equilibrium where growth and a path toward profitability can coexist.

What should excite us all is that, unlike the go-go IPO market of 2021, the next IPO boom promises to be more sustainable. For investors of all stripes, this will mean the opportunity to buy in early on companies that will drive the next cycle of growth and innovation.  After years of wild market swings driven by SPACs, meme stocks, and get-rich-quick crypto, we should all be excited about the chance to invest again in the “buy for life” high-quality innovators that will shape the future.

David Meadvin is CEO of the corporate strategy firm Day One.