This year may be a disappointing one for start-ups planning to go public. Those aiming to list in the first quarter are stuck in limbo, unable to start the application process until the government is fully re-opened.
Companies like Airbnb, Uber, Lyft, Pinterest and Slack have all signaled their desire to do an initial public offering, or IPO, this year. While those companies have attracted billion-dollar valuations through venture capital investments and big stakes by major investors like Softbank, smaller start-ups that are relying on a windfall from an IPO as their next source of funding likely can’t afford to wait.
Ryan Gilbert, general partner at Propel Venture Partners, said as the long-term effect of the partial government shutdown is starting to set in for Silicon Valley. The IPO calendar is looking empty for the first quarter and these delays are bound to have a “knock-on effect.”
“Smaller companies that aren’t able to access capital from the Softbanks, or the $100 billion funds of the world, need IPOs as the next stage of the fundraising process,” Gilbert told CNBC. “If they’re unable to access public markets, they’ll have to go back to existing financing and if an IPO is their only path, they may have to cut back operations.”
The Securities and Exchange Commission is the agency charge of green-lighting the IPO process. It and other key departments are closed as the shutdown entered its 21st day on Friday, tying a record for the longest lapse in funding. The fight for President Trump’s border wall raged on as about 800,000 federal employees were either furloughed or temporarily working without pay.
The SEC has staff “available to respond to emergency situations involving market integrity and investor protection, including law enforcement,” but most other functions are closed, the agency said on its website.
“When the government does re-open, the SEC will have a backlog of applications,” according to PitchBook analyst Cameron Stanfill. “That causes delays and could throw a wrench in some plans for those looking to file.”
Last year, the highest number of VC-backed companies entered the public markets since 2014, according to a report out this week from PitchBook and the National Venture Capital Association. Venture capital exits hit $120 billion — a 33 percent increase from 2017, largely thanks to IPOs and buyouts. The government shutdown could dampen that total for this year, according to the PitchBook report.
Securities lawyers are also dealing with delays. Anna Pinedo, partner in the capital markets group at Mayer Brown’s New York office, said there’s no good time for a government shutdown. But January, typically one of the busiest months for IPOs, is especially bad.
“Right now, we’re in a bit of a holding pattern,” Pinedo said. “Clients would appreciate certainty. They want to know what their timeline looks like for a deal, and need to be able to plan around that.”
As markets began to wobble in October, some issuers who were planning to list in early December or November pushed their debuts to early 2019.
“I’m sure they’re regretting that decision now,” Pinedo said.
The IPO process can take anywhere from three to nine months, she said, and involves getting comments from the agency, helping underwriters respond to comments, dealing with the New York Stock Exchange or Nasdaq. Almost every step of that process is now on ice.
Pinedo said the delays could mean more companies going public at the end of 2019, instead of the beginning. If companies can’t begin that process until the government opens, their next viable option would be summer. That’s not ideal for bankers and investors, who are typically taking time off for vacation then. And for European investors who often take the month of August off, forget it.
“No one wants to go public the during summer,” Propel Venture Partner’s Gilbert said. “We’re most likely looking at mid third quarter through the end the year.”
Even if companies had access to endless private funding, certain regulations require them to go public when they hit a certain amount of shareholders.
The JOBS Act, signed by President Barrack Obama in 2012, raised the amount of shareholders a private company could have from 500 to 2,000 before a company had to file the same information as public companies. In many cases, companies decide to go public at that point. But some start-ups also have an agreement with their investors that they will go public by a certain deadline, Venture Partner’s Gilbert explained, adding that Uber has an agreement with investors to list by 2020.
Still, the shutdown may be a welcome speed bump for some. Volatility in the public market was likely a source of anxiety for companies marching towards an IPO. Stocks are well off of their 2018 highs as investors factor in a worsening global economic outlook, trade war, and now an ongoing government shutdown.
Lonne Jaffe, managing director at Insight Ventures, which has had more than 40 IPO exits including DocuSign last year, said companies could embrace the SEC hold-up as a much-needed excuse.
“It’s on opportunity to delay without saying you’re worried about the markets,” Jaffe told CNBC. “They could be breathing a sigh of relief.”
He pointed to Facebook’s IPO. The public offering was full of missteps that caused some investors to be shut out of the deal altogether. While the company recovered, the 2012 IPO fiasco “stayed with them for a long time.”
“I suspect that a lot of a lot of them are scrambling for alternative sources of funding,” Jaffe said.