Wave of Fintech IPOs and acquisitions coming in 2024?
With the start of the new year well underway, I wanted to share my perspective on some of the developments I expect to unfold in the capital markets, notably on the IPO and acquisition side.
This isn't meant as financial guidance, but more as an interpretation of the trends from my unique perspective.
So let’s jump in.
Return of the IPO: Don’t call it a comeback.
Unless you’re living under a rock, you know 2023 was not a banner year for the IPO market– a year described as the "hangover after the pandemic IPO party" of 2022.
To provide some context, a total of 141 IPOs raised $22.2 billion in gross proceeds in 2023, which was a 15.1% decrease in the number of IPOs compared to 2022, but a 21.3% increase in gross proceeds raised– so at least that’s good.
But to add insult to injury, the median return for all 2023 U.S. IPOs through the end of the year was a negative 22%, reflecting the challenging conditions in the market.
There's a consensus the IPO market will experience a resurgence in 2024. The uptick is expected in the second half of the year, especially if the Federal Reserve starts cutting rates. If that happens–as many pundits expect–hold on to your hats.
Now, the IPO landscape has always been influenced by overall economic conditions. 2023 was no different. What’s different in 2024 is:
- Pent-up investor demand following a lackluster 2023 and the fact companies have delayed going public due to challenging market conditions.
- Interest rate expectations.
Reason a) is more-or-less self-evident, while b) is a little more nuanced.
We’re coming off a period when the Federal Reserve raised rates faster than at almost any other point in its history. When the cost of capital doubles or triples in a short amount of time, it’s no secret investors hold on to their wallets, and that’s what we saw in 2023.
But the wind is changing direction.
In December 2023, the members of the Federal Open Market Committee (FOMC)–the group responsible for setting the level of interest rates in the U.S. economy–submitted their projections, anticipating changes in real GDP, the unemployment rate, and inflation for the years up to 2026.
The Fed publishes its projections for interest rates in what’s commonly referred to as the “Dot Plot.” Here’s what the most recent one looks like.
Side-bar: has anyone ever seen more dispersion in the Fed’s dot plot? As I digress.
For 2024, the median projection for the federal funds rate is currently 4.6%, with a gradual decrease to 4.1% by 2026.
The tl/dr is the Fed expects economic weakness, and they’re anticipating the need to lower interest rates in 2024 in order to stimulate the economy.
So, there’s reason to be cautiously optimistic in 2024 (from an interest rate perspective), and that could influence expectations of a potential reduction in cost-of-capital that could fuel a mini IPO boom (as an aside, this could finally lead to a narrowing of the gap between public and private market valuations which would be long overdue and welcome).
For these reasons and others I’ll elaborate on below, my expectation is we’ll see a surfeit of quality companies going public in 2024, as investors look for companies with histories of strong revenue growth and profitability potential with the overall market proceeding cautiously relative to previous years. And caution is warranted. Remember SPACs? Investors sure do. Once burned, twice shy.
Here’s my take on some of the high-profile companies potentially IPO’ing throughout the year, and I’ll start with my alma mater.
Now I’m biased, but it’s safe to say Plaid is recognized as having played a crucial role in fintech’s rapid ascent, amassing over 4,000 customers including majors like Coinbase, Venmo, Microsoft, and Google. Even after the termination of its acquisition by Visa, Plaid has continued to grow impressively and has moved closer to profitability (likely already there).
Plaid’s decision to take on investments from key players in the financial services industry early on, such as American Express, Citi, Visa, MasterCard, and Goldman Sachs, not only accelerated its growth but also built considerable credibility and brand recognition within the traditional financial services sector. These relationships will come in handy as they navigate an IPO.
The executive team at Plaid includes impressive individuals with experience at companies like BlueVine, Square, Bain, and Dropbox to name a few. The company has done a phenomenal job adding the type of people that strengthen its leadership and readiness for the public markets. Eric Hart, Plaid's recently hired Chief Financial Officer (their first!), brings over 13 years of experience from Expedia, where he served as CFO and was responsible for strategy, business development, and global M&A. Hart’s experience taking Expedia public is as strong an indicator of Plaid's preparation for a potential IPO as I can think of.
Plaid’s been actively involved in advocating for open banking regulations and has led significant changes in the industry, such as transitioning to API-based data connectivity. Their proactive engagement in regulation and policy development is the stuff of legend. For what it’s worth, Reg. 1033 (which I believe is hugely favorable to Plaid) is really just a trailing indicator of all the effort they’ve poured into having a seat at the policy table throughout the years. It’s paid off with Reg. 1033, and it’s likely to pay off again in their preparation for an IPO.
After the Visa acquisition fell through, Plaid’s worked on diversifying its revenue streams and expanding its product offerings, a move often seen in companies preparing to go public.
Needless to say, I’m bullish.
Like so many of its BNPL peers, Klarna was written off in 2023 as a product of a ZIRP environment, and that ship–sadly–has sailed. But the company has since shown an impressive turnaround, moving from consistent losses to a recent pre-tax profit. This positive trajectory, coupled with strategic moves such as establishing a UK holding company, hint at preparation for an IPO.
Reports suggest Klarna is contemplating raising capital at a valuation of about $15 billion, quite a drop from its previous valuation of over $45 billion in mid-2021, not to mention the $30 billion it reportedly aimed for earlier.
Despite that, their model relies heavily on flighty consumer deposits, and that may give investors pause and could affect its valuation/positioning in the public markets. Buyer beware.
Not a fintech company, I know, I know. I just couldn’t resist!
OpenAI, known for its popular AI model ChatGPT and no stranger to making headlines, has raised eye-popping amounts of money, last valuing the company at around $29 billion. They have yet to turn a profit, though they anticipate significant revenue in 2024 and beyond.
A notable investment from Microsoft, amounting to $10 billion, indicates strong backing and faith in OpenAI's technology.
Despite the growth and investor interest, OpenAI’s CEO Sam Altman has stated that due to the company's unique structure and the nature of its work, there are no current plans to go public. But I have my doubts. Given how quickly things advance in AI, and the expectation that demand for AI-driven solutions will continue to rise, 2024 could be an opportune time for OpenAI to reconsider its stance. Whether the company decides to or not, it deserves our full attention in 2024.
Valuations (both public and private) have been on quite a ride since the start of the pandemic, with most companies experiencing big drops.
Fintech’s no exception. Stripe's valuation, for example, has plunged by about 70% to $52.5 billion in secondary markets.
Meanwhile only a few fintechs–such as Rippling, Gusto, and Deel–have seen their valuations increase since January of 2022.
So, valuations are down, and that means there’s blood in the water. We’ve already seen some activity from companies taking advantage of the landscape.
Robinhood's acquisition of the X1 credit card in 2023 comes to mind. The deal was seen as an essential step for Robinhood in broadening out its product and deepening its relationship with existing customers.The acquisition was also a strategic response to declines in its core trading business, and it diversifies the business and taps into new revenue streams.
Who could be next?
Known for its corporate card and spend management platform, Ramp has carved out an impressive niche, but the company's valuation has recently decreased from $8.1 billion (March 2022) to $5.8 billion in its latest funding round, and that creates an opportunity for would-be buyers.
Ramp's acquisition appeal is multifaceted.
Their customer base comprises fast-scaling startups. This offers long-term value to potential acquirers that could juice their own growth by tapping into a pool of companies that are expanding at a faster rate than the overall economy.
Ramp's technology stack is modern and could seamlessly integrate with larger platforms, making it an asset for legacy companies looking to innovate without having to invest heavily in developing products internally, and without a delayed time-to-market.
I hold Ramp in high regard for their achievements. The fact that I'm mentioning them as a potential acquisition target speaks volumes about my respect for them and I suspect I'm not alone in this viewpoint.
Wait, what? Didn’t I just list them as a company that could IPO in 2024?
I sure did, but that doesn’t mean they’re not an attractive takeover target. Despite the recent turnaround, their valuation is at a significant discount, and they just turned the corner in terms of profitability. This is a perfect set up for a buyer lurking in the shadows.
If consumer spending habits continue to shift towards more flexible payment options like Buy Now, Pay Later, Klarna’s brand and strong user base make it a valuable asset for acquirers looking to tap into the trend.
They have a global footprint–particularly in Europe and North America–which means an acquirer would instantly gain a foothold in multiple key markets. Additionally, Klarna's customer base–spanning a variety of demographics and shopping behaviors–offers cross-selling and upselling opportunities, which could be goldmines in terms of revenue growth for the right buyer.
As 2024 unfolds, the fintech sector is poised for significant changes, marked by what I think could be a resurgence of IPOs and a wave of strategic acquisitions. Companies like Plaid and Klarna, flirting with sustained profitability, are prime candidates for public offerings. Concurrently, firms like Ramp present attractive acquisition opportunities due to their innovative technology and coveted customer base.
Keep an eye on these developments– 2024 promises to be exciting!What did I miss? What are some private companies you think could make a splash in the public markets in 2024?