Did you know that many IPO firms fail to complete their offerings?
In my newly published Journal of Business Venturing Insights article, I call attention to how, between 1997 and 2021, nearly 1 in 6 firms that filed paperwork with the SEC to become publicly traded backed out of their IPO attempt. My findings show that withdrawing an offering attempt casts a “scarlet letter” on emerging growth companies. Subsequent attempts at accessing public capital are met with considerable delays, diminished offer proceeds, and an increased likelihood of delisting after trading begins. Over the past several decades, withdrawn IPOs have led to nearly $150 billion in unrealized offer proceeds for entrepreneurial ventures.
Accordingly, I argue in the paper that the withdrawal decision is an overlooked strategic choice worthy of more public attention. This decision critically impacts founder CEOs and entrepreneurs, challenging their future fundraising efforts and company credibility. It also affects institutional investors and venture capitalists by altering investment strategies and risk assessments, while early joiners and managers face implications for company valuation and career prospects. These dynamics highlight the profound influence of IPO withdrawal decisions on the entrepreneurial and investment landscape.
However, my research also demonstrates that withdrawn IPOs are just one critical component of an evolving IPO landscape that has changed drastically over the past 10+ years. In 2012, Congress passed The Jumpstart Our Business Start-Ups (JOBS) Act, aimed at promoting access to capital for young firms. Before the JOBS Act, companies interested in accessing public capital were subject to expensive filing preparations before gauging whether investors were interested in their business, increasing IPO risk.
A key component of the JOBS Act established an “IPO on-ramp,” allowing startups to “test the waters” of investor interest before costly regulatory compliance. This bipartisan legislation drastically reduced the risk and costs of “going public,” reduced the incidence of withdrawn IPOs, and made the public capital markets more accessible to smaller firms. An interesting outcome of this legislation is that much of the dialogue between investors and entrepreneurial ventures now occurs out of public view.
The reduction in the incidence of withdrawn offerings, a direct result of the JOBS Act, underscores the effectiveness of bipartisan efforts to remove roadblocks for startups. The insights from my paper can inspire future initiatives to bolster the growth and success of young firms, showcasing the significant impact that bipartisan legislative efforts can have in supporting entrepreneurs.
Read the full paper here to find out more: https://www.sciencedirect.com/science/article/pii/S2352673423000689
Author bio
Jarrod Humphrey, Ph.D., is an Assistant Professor in the Department of Management and Entrepreneurship at the Williams College of Business at Xavier University. He studies and teaches topics related to entrepreneurship and strategic management.