California could lose IPO crown as tech startup plans stall

By Linly Lin | Bloomberg

California has been generating the most initial public offerings of any US state every year since 2003. That streak could end this year unless the Golden State picks up the pace.

Only nine companies headquartered in California went public during the first three quarters of 2022, compared with 81 that launched IPOs during the same period last year, according to a Bloomberg News analysis. Even more dramatically, California’s share of US IPO proceeds fell to 2% through Sept. 30, compared with 39% for 2021.

Massachusetts has the lead at this moment, with 10 companies debuting in the public market this year, thanks to its robust biotechnology scene. Moreover, the total raised by those companies — $1.2 billion — is more than six times that of their California counterparts.

To zero in on US corporate activity, the Bloomberg News calculation is limited to IPOs of common stock and excludes the special purpose acquisition companies that helped propel listing volume to an all-time high last year. It also leaves out real estate investment trusts and closed-end funds.

California’s change of fortune is explained largely by the drop in valuations among Silicon Valley’s tech startups, said Jay Ritter, a finance professor at the University of Florida. “It is almost entirely just a reset of valuations,” he said.

Instacart, Stripe

Instacart and Stripe are among the California-based startups that have cut their valuations this year. That’s part of an abrupt change from 2021, when tech IPO valuations climbed to the highest level since the peak of the dot-com boom more than two decades ago based on average price-to-sales ratio data compiled by Ritter.

Discouraged tech companies in the state are waiting for the storm to pass, postponing their IPO plans, seeking alternative financing or trimming their expenses.

“The only one that will wind up IPO-ing if their value is down is someone who has no other alternatives,” said Larry Tabb, head of market-structure research at Bloomberg Intelligence. “Unless they don’t see an exit in the next couple of years, they are going to wait for as long as they possibly can.”

Startup backers and employees aren’t the only ones with a stake in California. IPO “instant-millionaires” have fueled a large portion of the state’s personal income tax revenue, said Somjita Mitra, chief economist at the California Department of Finance.

‘Immediate effect’

This year, the state’s homegrown IPOs raised only $177 million through the end of September, compared with an average of $16 billion for the same period in the past five years.

“We are already seeing an immediate effect,” said Brian Uhler, deputy legislative analyst at California’s Legislative Analyst’s Office. “And it does appear to be significant.”

In September, California employers’ income tax withholding payments were down 5%, or $354 million, from a year ago, according to an LAO tracker. This year’s IPO drought has been a driver of the decline, Uhler said.

Massachusetts, meanwhile, has been among the top three states with the most US IPOs for nine years running.

This year, four of the biopharmaceutical IPOs in the state raised more than $200 million in proceeds, eclipsing smaller California deals.

Biotech pipeline

According to Ritter’s data, 2022 will be the 10th year in which the biopharmaceutical sector represents about a third of newly public companies.

Biotech firms, after going public, typically seek an eventual acquisition once their clinical trials produce significant results. That unique growth pipeline gives them a more stable share of the IPO market.

When tech companies aren’t going public and biopharmaceuticals still are, the IPO market will have “a compositional change” and Massachusetts is going to stand out, said Martin Kenney, professor at UC Davis. “Boston is really the center of biotech startups.”

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