7 lessons from the 2020-2021 IPO boom you can apply today

Brian Hochberg, Chris Behof
7 lessons from the 2020-2021 IPO boom you can apply today

With signs pointing to a possible resurgence in IPO activity in 2024, our IPO specialists offer tips for companies contemplating going public.

After the unprecedented surge in IPO offerings in 2020-2021, which preceded the equally dramatic drop in IPOs in 2022, market observers are once again starting to see some encouraging signs. Although the pace of new filings has remained steady but subdued during the first three quarters of 2023, current economic factors – such as generally stabilizing market conditions, slowing interest rate hikes, and reduced stock market volatility – appear to be establishing an environment that could support a resumed upswing in IPO activity in 2024. The resurgence – if it comes – will differ from the 2020-2021 IPO boom in many ways, of course. Nevertheless, companies that are contemplating a public offering in the near future can benefit by applying some lessons learned during that unprecedented peak.

Now and then: What’s changed, what hasn’t 

By almost any standard, the surge in IPO activity in late 2020 through 2021 was historic. The boom saw a total of 1,415 new IPOs in U.S. markets during the six quarters commencing in Q3 of 2020 and continuing through Q4 of 2021 (see exhibit).

As the exhibit shows, that total more than quadrupled the number of offerings in the preceding six-quarter period (Q1 2019-Q2 2020), which saw only 332 IPOs. Moreover, the slump that followed the boom was even more dramatic, with only 260 IPOs during the subsequent six quarters (Q1 2022-Q2 2023) – a drop of more than 80%.

Exhibit: The 2020-2021 IPO boom 

The 2020-2021 IPO boom
Source: Crowe analysis; data from Stockanalysis.com as of Sept. 30, 2023. 

Comparing today’s economic conditions to the circumstances that led up to the 2020-2021 IPO boom reveals some similarities. But a closer look also reveals some important differences between the coming potential resurgence and the 2020-2021 IPO boom, the most notable being the pace of the comeback.

The 2020-2021 IPO boom was driven in large measure by the historically low cost of capital at the time. That obviously is not the case now. As a result, many of today’s investors are still in “wait and see” mode, hesitating to pay the valuations that private companies are looking for. Companies considering an IPO in the near future should understand that the anticipated uptick in market activity likely will be significantly less dramatic than the 2020-2021 IPO boom – and thus more difficult to discern in advance. However, a recent Federal Reserve statement seems to indicate that interest rate decreases might be coming later in 2024, which could help stabilize market and IPO conditions.

Another probable difference is in the structure of the offerings themselves. In the 2020-2021 IPO boom, many special purpose acquisition companies (SPACs) were formed strictly for purposes of raising capital and merging with a private company target, with no other ongoing commercial operations. The coming resurgence is likely to involve relatively fewer SPAC transactions with greater reliance on more conventional IPOs. To be sure, SPACs will remain a viable avenue for taking some companies public, but uncertain market conditions, enhanced regulatory scrutiny, and elevated shareholder redemptions are all likely to contribute to a decreased volume of SPAC transactions.

The nature and maturity of the IPO companies also could be different this time around. IPOs in the 2020-2021 boom often involved early-stage high-growth companies that were not yet profitable or financially stable but that had great growth potential. Because of that potential, many investors were willing to meet high valuations. With today’s higher cost of capital, investors are looking more carefully for a strong investment thesis, demonstrable results, and a credible plan for financial stability in both the short and long terms. Some high-growth startups might still be attractive, but more mature companies are likely to have an advantage in 2024.

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Defining success: What 2020-2021 taught us

The first measure of success for any IPO is whether it met or surpassed the company’s stated objectives in terms of capital raised. But short-term performance in the year after the IPO is an equally critical measure. Stock prices are an indicator of how investors are reacting to the company’s post-IPO performance against its investment thesis, as well as whether its valuations and projections were realistic.

In retrospect, it is apparent that a number of the companies that went public in 2020-2021 actually were not ready and might have been better off pursuing different strategies. Their shares are now trading well below their IPO offering prices, and their market caps are lower than expected. 

Beyond the numbers, stability in the executive ranks is another indicator of a successful IPO. In the 18 months since the IPO boom ended, there have been numerous examples of company founders or key executives losing control of the businesses they built and took public, forced out by boards that grew dissatisfied with their inability to make a successful transition into a public corporation.

Applying the lessons learned

The experiences of companies that went public during the 2020-2021 surge in IPOs – including their experiences in the 18-month slump that followed the IPO boom – can provide some valuable insights. The lessons to be learned are many and varied, but seven points can be particularly helpful to companies that are contemplating their own public offering in the near future.

1. Start preparing early. Taking a company public is a complex and demanding process, with the U.S. Securities and Exchange Commission (SEC) and other regulators demanding extensive amounts of highly detailed information that must be included in registration statements and subsequent filings. Among the requirements are historical financial statements prepared in conformity with U.S. GAAP applicable to public business entities and SEC requirements that have been audited in compliance with Public Company Accounting Oversight Board (PCAOB) standards. Companies previously might have been audited using American Institute of Certified Public Accountants (AICPA) standards, and arranging for additional audits under different, more stringent standards can be very time-consuming. Additionally, companies must understand and incorporate SEC-compliant financial statement accounting, presentation, and disclosure requirements that often are different from what the company currently prepares.

The sudden drop in IPO activity at the beginning of 2022 took even seasoned analysts by surprise. Companies that underestimated time needed and were unable to meet all requirements by late 2021 might have missed their ideal market timing, even if they delayed their offerings by only a few weeks.

The lesson for today’s companies is clear: Start preparing early so you can move quickly once market conditions are right. The window of opportunity can close quickly, as it did in early 2022. 

2. Have the necessary infrastructure to avoid post-IPO problems. Just as companies take many steps to prepare for the IPO, they also must complete many steps to continue operating as a public company. So while the first hurdle is to get through the S-1 filing and meet all the IPO regulatory requirements, companies also need to look beyond the initial offering to make a successful transition.

Earnings releases, Form 10-Qs, and other public statements have strict deadlines, even for companies that qualify for emerging growth company status. Added to these, the SEC is considering proposed rules for various environmental, social, and governance (ESG) topics and has issued final cybersecurity disclosure rules – areas that are increasingly important to investors. The bottom line for companies considering an IPO is that the SEC has an extensive current rulemaking agenda focused on investor information needs, and any final rules might increase the volume of disclosures required.

Companies must have adequate technology infrastructure in place to consistently produce financial reporting quickly and accurately. They also need to have sufficient human expertise in place, including an internal audit function that understands SEC reporting requirements and compliance priorities.

The post-2021 slump offered many examples of companies that rushed to get in on the IPO boom before they were fully prepared to operate as public companies. Companies that needed extensions on filing deadlines – or worse, needed to restate results after a rushed, erroneous filing – quickly lost investor confidence. Failures in this area send a message to investors that the company does not possess the necessary management skills and discipline to be a successful public company. 

3. Build a strong and qualified team. Financial reporting is only one area where expertise is needed. Companies also need access to specialized legal, finance, accounting, and valuation expertise, as well as experienced SEC counsel. Because private companies typically do not have all the needed expertise in house, they should line up third-party professional support teams.

Here again, it is important to get an early start. Drawing on an existing and proven relationship is much better than rushing to bring outside specialists up to speed at the last minute. In 2021, companies that did not have strong performers on board early often found themselves struggling to assemble such teams quickly, as the high demand for proven talent led to a shortage of qualified specialists.

4. Establish strong CFO leadership. Companies going public need a balanced combination of both finance and accounting expertise in both the pre- and post-IPO phases.

CFOs need to know everything about their numbers for investors. They need to have a clearly articulated financial strategy and detailed forecasts. In addition, if plans are not met, they need the ability to clearly communicate to investors why that happened as well as mitigation strategies.

Those companies that were successful in raising capital during the 2020-2021 IPO boom generally were those that had strong, finance-oriented CFOs in place. These leaders were clearly in tune with the companies’ valuations and capital needs.

In addition to finance expertise, however, newly public companies also need strong accounting leadership. A chief accounting officer or controller with experience in SEC reporting will be a key leader during the critical period immediately following the IPO.

5. Align stakeholders’ expectations. It’s important that all the major participants in an IPO have realistic expectations. Existing shareholders and executives must recognize the new requirements they will face as a public company and realize they likely will need to make some major changes in order to adapt.

But the newly incoming board members and officers must enter the relationship with eyes wide open as well. Board members with backgrounds in large public companies bring valuable experience and understanding to the business. At the same time, however, they must understand the inherent differences in a newly formed, smaller enterprise, and they often will need to adjust their expectations to reflect their new circumstances.

In the months following the 2020-2021 IPO boom, numerous new board members and officers with large public company experience found themselves frustrated with their new companies’ relative lack of resources and limited capacity to meet financial reporting requirements. New board members and officers should be sure they recognize this and adopt appropriate governance practices.

6. Know the market. When going public, timing is critical. As noted earlier, the sudden drop in IPO activity at the end of 2021 demonstrated how quickly market sentiment can shift, which is why companies need to be able to recognize trends and anticipate market inclinations in advance.

Identifying the right time for an IPO is too important to simply leave it to chance or to rely on instinct. Access to market expertise, either in house or from external sources, is essential. While companies typically have relied on their investment bankers or other underwriters for market advice, many of these experts were also caught by surprise by the sudden 2022 downturn. At a minimum, companies anticipating an IPO should consult with multiple trusted advisers for insights into market conditions and outlooks.

7. Verify an IPO is really the right strategy. Possibly the most fundamental lesson companies can learn from the most recent IPO boom is to be sure an IPO is actually a good idea in the first place. As important as timing is, management should not take a company public just because the market seems right. management also should be confident in the company’s long-term growth projections, investment thesis, and path to profitability. Equally important, it should be confident these will stand up to scrutiny in the public markets.

Before committing extensive time and resources to IPO preparation – and certainly before making any public moves in that direction – senior management should verify that an IPO is the best way to achieve their objectives. For example, if the goal is to provide early investors with a way to exit, recoup their investment, and lock in gains, going public might be the right step. But other strategies might offer a better return, and savvy investors will want to consider all alternatives before committing.

Similarly, if the objective of the IPO is to build up the company’s capital base or to provide funding for new opportunities or the next phase of growth, management should ask if going public now is the best way to achieve those financial goals. A prudent management team will seek advice from a variety of trusted sources as it explores alternatives.

No one can predict with 100% confidence that the potential 2024 IPO resurgence will actually come to pass. Despite the uncertainty – or perhaps because of it – companies currently considering an IPO should remember the lessons from the 2020-2021 boom, recognize what’s going to be different this time, and understand how those differences could affect their plans.

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Brian Hochberg
Brian Hochberg
Partner, Technology, Media & Telecommunications Consulting Leader
Chris Behof
Chris Behof
Senior Manager, Accounting Advisory