The year 2021 was an unusual year by any standard. The boom in the capital market in general, and in technology shares in particular, have severed the linkage between company’s value and reality, and it was clear to everybody that it will not last forever. The general mood has changed in recent months: interest rates began to rise, the market shifted from a search for growth companies to profitable companies, and the value of public companies that completed an IPO at high values declined. The decrease in a company’s value obviously impacts the employees’ equity value, but all in all there is a return to reality.
To confirm this assertion, S-Cube, a subsidiary of IBI Capital that specializes in valuation of high-tech companies, conducted a study to examine the extent to which the “slowdown” in fact slows the companies and impacts the financing rounds.
The red screens led investors to selectively choose mature companies
The study, which examined the capital raised by Israeli technology companies and companies associated with Israel in the first half of 2022, surprised even the optimists among us. While plunging technology share prices in the first half of the year suppressed investor appetite for risk, the value of private technology companies in advanced capital-raising stages continued to rise.
The Nasdaq index lost about 30% of its value and investors reduced their investments in the early financing rounds of small companies. However, investors continued to invest in technology companies in advanced financing stages (D+ rounds) whose value also rose. Investors reduced their risk level in the first half of 2022, selectively choosing mature companies and preferring to invest in companies in advanced financing stages.
Similar to past crises in 2008 and 2018, once the crisis will pass, mature companies will undoubtedly return to IPOs, and the study supports this conclusion as it showed that the value of these private companies continued to rise. This is the answer we give to anyone who asks about the slowdown effect on the market, and whether this is the right time to do an IPO.
Prepare during market downturns. Execute during market upturns
Keep in mind that having a company ready for an IPO is a process, and that you can’t seize an opportunity in the capital market and go do an IPO if the company is not ready. In the framework of the process, the company must be organized from accounting and legal aspects. Furthermore, the corporate governance standards must meet the high standards of public companies while ensuring that the company understands and embraces the changes. It is also important for the company’s service providers to be well-prepared and suited to provide service to a public company. For example, managing the company’s incentive plan is different for a public company and for a private company, therefore IBI Capital, which specializes in accompanying IPOs and the operation of public companies, is the right vendor for such matters.
Raising the company standards to those of a public company is critical and should be implemented during crisis time so that the company will be prepared and ready when the crisis passes. Therefore, the current period offers an excellent window of opportunity for these companies to optimally prepare for the end of the crisis, and even become stronger.
Looking forward, the technological revolution that began before the corona pandemic and is continuing nowadays, is not expected to stop because of a market slowdown or even because of a recession. To the contrary, technology is one of the engines of the global economy in emerging from the recession. Therefore, we believe that the value of companies in the advanced financing stages with a proven business model will continue to increase in the second half of 2022 as well. These companies should plan ahead and continue on to the requisite next stage – an IPO.
The aforesaid information is solely for informative and general purposes and should not be construed as comprehensive and/or exhaustive information in respect of all the aspects.
The aforesaid does not constitute legal, financial, tax or economic advice or a substitute for any professional and personal advice.
Tzvika Bernstein is the Managing Partner of IBI Capital