Justworks, a venture-backed software startup focused on the HR market for small and medium-sized businesses, announced earlier today that it would delay its IPO. In a statement to TechCrunch, Justworks said that it “decided to delay its IPO due to market conditions at this time.”
An IPO delay is just that, a public debut pushed back. But Justworks’ decision to put its public offering on temporary hiatus comes on the heels of rapid declines in the value of recent technology debuts employing traditional IPOs, SPACs and direct listings. Even more, Justworks’ now-delayed IPO follows a selloff in the value of software and technology shares more generally.
Is there something bigger afoot than one company’s stumble?
Reading the tea leaves
The Justworks IPO delay is the latest data point in what could be a worsening exit market for unicorns. Otherwise, we wouldn’t make a fuss.
Why? Sometimes when a private company wants to go public, it finds that public-market investors are not willing to buy its shares at the price it had in mind. By taking more time, the IPO hopeful can tidy up its numbers, perhaps answering some of its critics head-on with results or business tweaks. Once the company has tuned its performance and image, it can try to float once again.
Such a private-public disconnect can stem from a gap between a company’s results, what it thinks they are worth, and the public market’s view of the particular firm in question. Alternatively, a similar disconnect can arise from the public markets simply being on a different page regarding valuations than the private markets. Our read of the Justworks news is that it’s likely dealing with at least the latter issue, and perhaps the former as well.
The possibility of a gap between how private investors value growth-focused tech companies and how the stock market values those companies matters because of how many richly valued tech startups need to find an exit in the coming year. In bad news for those companies, a number of factors likely made Justworks’ IPO timing difficult, hinting that other unicorns could also struggle to exit in today’s investing climate.
It’s worth recalling just how much things have changed since the headiest days of 2021:
- The value of the Nasdaq Composite has fallen by just over 6% from its all-time records set last November. That decline itself is not too material. However:
- The value of software and cloud stocks as measured by the Bessemer Cloud Index (which trades as $WCLD) has fallen just over 27% from all-time highs set in 2021. The result of this repricing of the value of software stocks is that the value of recurring digital incomes is lower than it was. For private companies targeting public-market valuations more fitting with now-dated and richer revenue multiples, it could prove difficult to find a consensus price.
- And there could be some more general exit jitters afoot. As TechCrunch has explored, the spate of SPAC-led flotations that we’ve seen in recent years has left a littering of corpses on the public markets. Even more, a number of high-profile IPOs and direct listings have lost ground from their IPO price (Robinhood is a clear example here), or at a minimum have given back much of the gains accrued in the days following public-market debuts (Coinbase trades today around 45% off all-time highs set following its 2021 direct listing).
- Finally, the macro environment has also changed, with investors of all stripes anticipating a faster and potentially more painful repricing of money through central-bank interest rate policy, especially in the United States. Monetary tightening is expected to make less risky assets more attractive to investors and high-risk investments like IPOs less attractive.
Taking the above factors as a group, it’s almost not surprising that Justworks is putting its IPO on ice for now. It probably set its public offering timeline when things simply looked different — recall that software stocks hit an all-time high back in November 2021, mere months ago.
Justworks is a single company. What about others? Reddit has filed privately, as has Via. Along with Justworks, those were the companies we were anticipating to kick off the 2022 IPO calendar. And now, I wonder how quick any of the three will be to the public markets.
But don’t worry! Venture capital funding smashed all-time records last year, with a record haul of new unicorns amid a wave of private-market cash valuing startups at higher prices, faster than ever before. We’re clearly in one of the great moments of private-market value creation on paper.
Justworks’ IPO delay indicates that the enthusiasm gap between private markets and their public analog is wide. And for pricey unicorns still bleeding cash, that’s terrible news. (Update: Justworks reached out after publication to note that it is in fact profitable; this is a fair point, as I was more pointing a finger at other companies and Justworks was profitable in its most recent fiscal year.)