Shares of Ferrari, the Italian sportscar maker, sped about 6 percent higher in its initial public offering Wednesday, but the rest of the IPO market is mostly spinning its wheels. Valuations for IPOs are beginning to tumble, shares of companies that recently went public are falling and investors are becoming increasingly cautious about stepping into new offerings.
Of the 139 companies that filed for an IPO through early October, 60 percent were trading below their offer price, according to a report from Renaissance Capital. A principal at Renaissance, Kathleen Smith, told Fortune that when more than 50 percent of companies that have recently gone public are trading below their initial valuation, it’s a warning sign for others.
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Biotech IPOs have been faring the worst over the past few months, as they’re suffering from the recent controversy over drug pricing. Strongbridge Biopharma priced its IPO last week at $25 million, less than a third of the $86 million it had originally sought. Several other biotech companies went to market with valuations that were 30 to 40 percent below their initial expectations.
The hesitation that investors are now showing may also carry through to the venture capital market, at least for certain companies.
Venture capital funding overall has risen so far this year. Through the first nine months of 2015, $57.9 billion has already been invested, more than the $56.5 billion raised in all of 2014. But the weakness in the IPO market is likely to catch up to the private market when investors can’t depend on public markets to provide a profitable exit.
Already, while VC funding is up from last year, deal activity has fallen off in 2015. Only 3,355 deals have been reached through the third quarter of 2015, down from the 4,943 reached all of last year, according to a report from CB Insights and KPMG. If deal activity continues at this pace, the 2015 total will fall short of last year’s.
CB Insights and KPMG attribute the fall in the number of deals to a new focus by investors on late-stage deals and mega-rounds, defined as financings of $100 million or more, and less on the seed stage. The share of investment put toward early deals fell for the fifth straight quarter, reaching 23 percent during the third quarter of 2015, down from 33 percent during the same period last year.
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Fewer investors are taking the risk of investing in the early stages of a startup, uncertain that they’ll be able to sell the shares for a handsome gain when the company eventually goes private. And they’re right to be cautious. Shares of companies that went public this year have dropped by 2.4 percent on average, according to Fortune, while shares jumped by 21 percent in 2014 and 42 percent in 2013.
