Despite the soaring demand for technology stocks, the market for initial public offerings (IPOs) has been virtually shut down since 2021. This lack of activity has hindered startups from accessing the capital they need to thrive. Without a robust IPO market, venture capital firms struggle to attract institutional investors, leading to a reduction in available funding for startups. As a result, many startups have faced financial difficulties and, in some cases, bankruptcy due to a lack of financing opportunities.
The peak of the IPO market was during the dot-com boom when a surge of startups emerged to support the growth of e-commerce. However, the long-term performance of IPOs during this period turned negative, leading to a bust. Research shows that between 1995 and 2000, 2,469 IPOs raised a total of $266 billion, with wide variations in returns over time. While the average three-year return on IPOs during this period was 4.6%, returns in 1999 and 2000 were strongly negative at -48% and -60%, respectively.
Experts point to various factors that have contributed to the decline of the IPO market, such as the demise of special purpose acquisition companies that drove the short-lived uptick in 2021. Geopolitical uncertainty and higher interest rates have also played a role in dampening investor enthusiasm for IPOs. It is believed that the market will only revive when companies going public can demonstrate growth rates comparable to high-performing tech companies like Nvidia, which have experienced significant revenue growth in recent quarters.
One potential solution to reviving the IPO market could be the emergence of successful generative AI IPOs. These companies, which could include providers of AI chips, data centers, large language models, and generative AI applications, have the potential to attract significant investor interest if they can sustain rapid growth post-IPO. A wave of successful generative AI IPOs could lead to increased investment in this sector, potentially sparking a new boom comparable to the dot-com era.
Despite the promising outlook for generative AI companies, there is currently a lack of activity in the IPO market for such firms. Out of the 12 potential IPOs slated for 2024, only one company, Databricks, is on the list. Databricks, which is experiencing rapid growth and could be an attractive investment opportunity, represents the limited offerings in the IPO market at present. However, the potential for a sustained boom in generative AI IPOs remains uncertain, as the market continues to face challenges in attracting high-growth companies to go public.
