Lessons From the Biggest Flops of the Decade
Companies often experience challenges when going public for the first time. Sometimes even initial appearances suggest failure right from day one.
Management and investors of well-recognized companies may find this to be particularly disheartening; inadequate research or overly optimistic projections can lead to disappointing share prices and consequently lead to disappointed shareholders.
1. Underestimating the market
Though the IPO market has seen substantial success over recent years, there have been several disappointments as well - this being both difficult for those involved and detrimental to the capital markets.
Many IPOs fail due to overhype and overpricing, leading to unrealistic expectations among investors. If a company's fundamentals or future growth prospects don't support the high price point, investors may lose faith, leading to liquidity issues and stock decline.
Another cause of IPO failure can be misalignment of interests between investment bankers and the companies they're advising, and those they advise. Investment banks are sometimes incentivised to raise IPO prices so they can generate fees, potentially overvaluing companies. As a result, more startups are forgoing using investment banks when going public; doing so provides greater transparency to investors while decreasing risks related to failed offerings.
2. Lack of market acceptance
Failure of market research is also one of the leading causes of IPO failure. Companies should conduct extensive market analysis before embarking on their IPOs, in order to gain an understanding of competition, customer demand and industry trends; those that fail to do this may launch in unfavorable market conditions leading to poor stock price performance and ultimately result in failed offerings.
Regulatory burdens have also contributed to IPO's decrease over the last two decades. Some analysts contend this decline can be linked to stricter requirements like Sarbanes-Oxley that have made going public more challenging and expensive for small businesses.
Under unfavorable market conditions or economic turmoil, companies seeking an initial public offering (IPO) may experience difficulty attracting investors. Furthermore, if their financial results or debt levels fall below expectations or their stock price does not meet desired goals they could encounter difficulty reaching desired stock price which in turn results in decreased investor enthusiasm and ultimately leads to their failure and an unsuccessful IPO launch.
3. Insufficient market research
Even amid all the hype, initial Public Offerings (IPOs) remain risky investments. A failed IPO can seriously harm a company's reputation and make attracting investors more difficult; furthermore, employee morale may decline substantially and hamper growth.
Overinflated valuations can also contribute to the failure of initial public offerings (IPOs). WeWork was valued at $47 billion prior to its IPO but quickly fell to $12 billion after initial public offerings; eventually it closed its doors in 2022 due to failing returns generation efforts.
Timing can also play a big role in failed IPOs. While many IPOs occur when the market is vibrant, they can quickly lose steam over time--especially if a company was unprofitable at launch. Therefore, conducting rigorous research before attempting an IPO is essential; taking all factors such as business model viability and financial management into consideration are essential in creating an enduring success for companies seeking an initial public offering (IPO).
4. Failure to manage expectations
Investor confidence can wane for various reasons in an IPO. Subpar business fundamentals or exorbitant valuations may cause them to waver; for example, Allbirds was valued at nearly double their fiscal 2020 revenue when it went public and failed to turn a profit for several years post-IPO in 2023.
Surf Air Mobility experienced post-IPO difficulties as investors doubted its electric aviation model and high operational costs, both of which could have been mitigated through better aligning market expectations with core business fundamentals.
Even with its challenges, an IPO remains an effective means for startups to raise capital and become publicly traded. Some businesses may find that remaining privately held may be more profitable. Furthermore, more startups are turning to selling shares to existing public companies as an exit strategy.