The fast-moving coronavirus threat means challenging times for IPO hopefuls.
Anxiety over the continuing COVID-19 outbreak again roiled the markets on Thursday, with the Dow Jones closing 969.58 points lower, wiping out most of Wednesday’s gains, after the number of known U.S. cases rose and California declared a state of medical emergency.
Market volatility, and overall uncertainty around the impact of COVID-19 on the global economy, is putting a chill on dealmaking for now. And that includes companies aiming to go public this year.
“Companies that are on the IPO track, or at some stage of that track, are certainly spooked,” said David Makarechian, partner at O’Melveny & Myers and chair of the firm’s emerging technologies practice. “The general wisdom is that volatility is very detrimental to the IPO market.”
Coronavirus fears sent the stock market into correction territory last week, and since then, a mix of emergency rate cuts and election year developments have sent stocks on a roller coaster ride not seen since the 2008 financial crisis. On Thursday, the prominent venture capital firm Sequoia Capital was willing to draw the comparison, advising companies to prepare to rein in spending and extend their cash runways in the event of an extended decline in fundraising.
Pre-IPO companies will likely need to push off any plans to go public for several weeks, at minimum, to avoid market whiplash.
“I wouldn’t push any IPO out until we’ve passed peak panic in the U.S. That probably means you wouldn’t go out, at earliest, until May,” added Duncan Davidson, a partner at Bullpen Capital.
Earlier this week, Bloomberg reported that Airbnb — which had originally sought to go public in mid-2020 — may delay its IPO plans until next year owing to coronavirus fears. The continuing outbreak has led to a decrease in travel, event cancellations and other secondary effects that may impact Airbnb’s business. Meanwhile, Warner Music Group, Cole Haan and a smattering of other firms around the world are also delaying IPO plans.
“Companies are certainly wondering if the IPO window is going to be open at the time they’re ready,” Makarechian said.
In addition to Airbnb, highly valued companies reportedly planning for a 2020 IPO include GitLab, Snowflake, Unity Technologies and DoorDash, among others.
Davidson added that many Silicon Valley firms were already in the process of rethinking fundraising plans after last year’s WeWork fiasco, which crystallized a growing skepticism towards highly valued, unprofitable, cash-bleeding companies looking to tap the public markets.
Firms in that category may have a doubly difficult time convincing investors to get on board in the face of an evolving coronavirus threat. And the crisis could trigger further scrutiny of IPO hopeful’s valuations and business plans, Davidson added.
“I can’t imagine [DoorDash] would get a $13 billion market value if they even got out…but the real tech should do just fine,” he said.