By Linly Lin | Bloomberg
California has generated the most initial public offerings of any US state each year since 2003. That streak could end this year unless Golden State picks up the pace.
According to an analysis by Bloomberg News, only nine California-headquartered companies went public in the first three quarters of 2022, compared to 81 that launched IPOs during the same period last year. Most dramatically, California’s share of U.S. IPO proceeds fell to 2% through September 30, from 39% for 2021.
Massachusetts is in the lead right now, with 10 companies making their public market debut this year, thanks to its strong biotech scene. Moreover, the total raised by these companies – $1.2 billion – is more than six times that of their Californian counterparts.
To focus on U.S. corporate activity, Bloomberg News’ calculation is limited to common stock IPOs and excludes 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 turnaround was largely driven by falling valuations of Silicon Valley tech startups, said University of Florida finance professor Jay Ritter. “It’s almost entirely a valuation reset,” he said.
Instacart, band
Instacart Inc. and Stripe Inc. are among the California startups that have reduced their valuations this year. It’s part of a stark change from 2021, when tech IPO valuations hit their highest since the peak of the dot-com boom more than two decades ago based on the data. price-to-sales ratio averages compiled by Ritter.
The state’s discouraged tech companies are waiting for the storm to pass, postponing IPO plans, seeking alternative financing or cutting spending.
“The only one who will end up going public if their value goes down is someone who has no other alternative,” said Larry Tabb, head of market structure research at Bloomberg Intelligence. “Unless they don’t see a release in the next two years, they’re going to wait as long as they can.”
Startup funders and employees aren’t the only ones with an interest in California. IPO “instant millionaires” fueled much of the state’s personal income tax revenue, said Somjita Mitra, chief economist at the California Department of Finance.
‘Immediate effect’
This year, local IPOs in the state have raised just $177 million through the end of September, compared to an average of $16 billion for the same period over the past five years.
“We’re already seeing an immediate effect,” said Brian Uhler, assistant legislative analyst at the California Office of the Legislative Analyst. “And that seems to be significant.”
In September, income tax deductions from California employers 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 IPOs in the United States for nine consecutive years.
This year, four of the state’s biopharmaceutical IPOs have raised more than $200 million in revenue, eclipsing smaller California deals.
Biotechnology pipeline
According to data from Ritter, 2022 will be the 10th year in which the biopharmaceutical sector will account for about a third of new public companies.
Biotech companies, after going public, typically look for a possible acquisition once their clinical trials produce significant results. This unique growth pipeline gives them a more stable share of the IPO market.
When tech companies don’t go public and biopharmaceuticals still do, the IPO market will experience “a compositional shift” and Massachusetts will stand out, said Martin Kenney, a professor at the University of California. at Davies. “Boston is truly the hub of biotech startups.”
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