(Song from the 1968 film Chitty Chitty Bang Bang, based on Ian Fleming’s novel by the same name)
No question, there are some ashes of disaster in the Silicon Valley Bank debacle. 8500+ people at various SVB entities are currently uncertain about their jobs and livelihoods, and sadly not at all uncertain about the value of their equity. From every perspective the collapse of the Silicon Valley Bank, to put it mildly, is a very sad, very disruptive, just plain awful occurrence.
However, sticking with song titles, this is not the end of the world as we know it. Many of those employees will recover under the bank’s eventual ownership structure, whatever that will be. Others will be snapped up by competitors trying to get a better handle on the magic that made SVB so important for so long. The companies that carefully saved money in deposit accounts at SVB, rather than say on an ego-trip Super Bowl ad, will find other places to stow that cash. In all likelihood, it is only the bank’s management that may well be cooked and, from everything we know so far, perhaps deservedly so.
But is this the end of Silicon Valley and ecosystem that spawns and grows innovative companies? Perhaps, the end of the county’s biggest engine of economic growth? That is surface-level thinking. This is a big miserable bucket of cold water on the undeniably overheated economy that prevailed in start-up land until early last year. When there is too much money in too many funds thrown with too much enthusiasm at too many companies, the timing is uncertain, the catalyst unknown, but the ending is a forgone conclusion and not a pretty one.
However, the thing about being doused in a bucket of ice water is that after a good shake, it’s not that hard to warm up and dry off. Just wait and see. So shake off the panic, take a deep breath and look around.
As many have stated for years and with clear evidence, this is not 2000, a time when, for many companies, behind the fancy website and astronomical valuation, there was no there there. Many of those internet darlings had optimistic slide decks and fancy-logoed t-shirts but not much (or anything) in the way of a sustainable business. Contrast that with today when many still well-funded private entities have real products and services that real customers want. These companies offer solutions to actual problems and therefore, compelling opportunities ahead. For them, even before the SVB debacle, the sushi was already gone from the lunchrooms. With the swoon in technology stocks, came an abrupt change in message from the boardroom from “Grow, grow, grow” to “Cut those expenses and aim for profitability ASAP”, a 180 that involves plenty of friction. Painful ? Yes but do-able and in process. Thanks to piles of cash raised in 2021, many have the runway to pull it off.
So we can check the first box. The ecosystem has spawned real products from real companies with enough resources to button up operations and soldier on. Unfortunately, the challenge isn’t just about what can be controlled by the finance department. Young company teams aren’t slaying a serpent, they are dealing with a Hydra. Specifically, while scrambling to adjust their operating M.O., these businesses also must contend with the incremental angst of ongoing macroeconomic uncertainty. In this environment, it is very difficult for long established companies to read the tea leaves and offer guidance with any accuracy. It is virtually impossible for younger businesses that have never been through one of these cycles to have a clue. Therefore, and quite correctly, many are being very, very cautious with their outlook for the next couple of quarters, hedging big-time on forecasts. Of course, what follows cautious forward-looking commentary from public company CFOs is, inevitably, lower stock prices. And these "value adjusted" companies? They are also known as “comps”.
And that may prove to be the good news.
Macro uncertainty, a change in the focus of the operating model, dramatically reduced valuations may not appear to aggregate into compelling catalysts for the re-emergence of an active IPO market. Appearances can be deceiving.
Until the SVB uh – event – many, not all but many, management teams and boards at private companies already at scale were content to rest on their balance sheets and proclaim the IPO simply won’t happen while valuations are wallowing beneath the sub-flooring. Stout treasury accounts and a renewed focus on cautious spending suggested that approach would work. Plenty of conversations this past 6 months that went like this: “Tighten up the P&L, heads down and when valuations come back, we will hit the public markets full speed ahead and bound for glory.
But that was then.
Everything changed last week when that virtual bucket – no tank - of ice water landed on the collective head of the Silicon Valley ecosystem (which by the way, is not geographically restricted to the west coast but rather every state that has any sort of entrepreneurial economy).
Suddenly, the meaning of the old saw “hope is not a strategy” is painfully and irrefutably clear.
· The easy money is gone - for most
· The relatively inexpensive lines of credit for “just in case” just got a lot more expensive and harder to land.
· The venture funds, so recently at-the-ready to fund every AI (or other) entrepreneur knocking at the door as they scrambled to find opportunities to disperse the oversized funds they raised, have concurrently opted to yank back the reins. Don’t call us; we’ll call you.
· The balance sheet that looked plenty strong enough suddenly looks less certain. The days of “What, Me Worry?” have been replaced by sleepless nights and badly gnawed fingernails.
The times, they are a changin’.
But. but, but…… these are still real business with real opportunities. While growth may be slower, operating models for many are growing stronger. Talented employees are more likely to stay put and, given the substantial layoffs of Q1 2023, it’s just a bit easier to selectively add to the teams. These companies still want growth capital, solid balance sheets and liquidity. Reiterating: companies are still looking for, and to some extent now driven, to find liquidity.
Welcome back to the IPO market. Q1, is about over and there was almost no IPO action. Q2 will be a time of continued adjustment and model re-alignment. By the time Q3 is over, many companies will have operating expenses under control, solid systems in place to measure outcomes from marketing, sales, engineering and overhead, a practiced ability to close quarters efficiently, and the painful recognition that stalling in hopes of attaining something near 2021’s valuation may be akin to sitting about waiting for a dude named Godot.
Some companies won’t get there from here. Plenty will. They will take this pretty-shocking SVB wake-up call to spiff up the engine, check the oil, study the course and get the right driver in the seat, ready to put that pedal down when the moment comes. About that timing…Will there be comfort about the direction of the economy and interest rates by Q3? Maybe. As 2024 will be an election year, it’s not unreasonable to assume the crystal ball will be less cloudy by then.
Will valuations have rebounded? Maybe some, but to previous levels? Nope. That shouldn’t matter. The thoughtful, well-prepared teams will likely recognize that going public isn’t just about the price on deal day. It’s about a fully liquid market, a message of on-going stability, an enhanced treasury account and the opportunity to earn, not hope, the way back to a more fulsome market cap.
How? Complete a smaller-than-originally-dreamed-of IPO, hit your forecasts, prove that yours is really a company, not a just a product or worse, a feature. Demonstrate to the throngs of institutional investors with too much cash on the sidelines today that the management team understands the responsibilities and frankly challenges of being public, and remind your employees that the stock goes up only if the business delivers.
You can’t win if you don’t show up and if you don’t get on the track, a competitor will take the pole position. Management teams, looking at you. Now is the time to put fuel in the tank and rev those engines. Class V can help. The IPO market is coming back sooner than you may expect.
