(Bloomberg) -- When US tech stocks were crushed by the emergence of DeepSeek this week, already-cautious investors found one more reason to be skeptical about buying into venture-backed initial public offerings, according to PitchBook.
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IPO activity for companies backed by venture capital firms has stalled over the last three years, reaching its slowest level since 2011, according to a PitchBook report from Jan. 24. Now, a spike in stock-market volatility may further complicate hopes for a rebound in public listings, which had already been in question.
Investors were spooked by the emergence of DeepSeek, a Chinese AI model that appears to be cheaper and more energy-efficient than its US-based competitors. The Nasdaq 100 Index lost almost $1 trillion in value on Monday.
The selloff was “a strong example of a volatility factor that would lead to many VC-backed companies having further difficulty accessing the public markets through IPO on terms they would be comfortable with,” said Kyle Stanford, lead VC analyst at PitchBook.
In its report, PitchBook warned of a dour outlook for IPOs in the first half of 2025 because there is a “pile up” of private companies waiting to go public amid an “unfriendly exit environment.” The firm expects to see 21 completed IPOs in the first six months of the year, a figure in line with the relatively slow pace in recent years.
“There’s a limited amount of capital available for IPOs and VC-backed companies will have to fight extra battles and may have to lower expectations on their valuations,” Stanford said.
Moreover, five of the top 10 IPO candidates the report highlights are in tech-related sectors that were battered in the DeepSeek downturn, like software-as-a-service, artificial intelligence and fintech.
“With VC-backed companies already wary of the public market, calmer seas will be needed to get listings back on track,” Stanford added. Tariffs imposed by the administration could also curb investor appetite for IPOs, the Pitchbook report said.
There’s also a problem of mixed returns and investor uptake for recent offerings. Reddit was the best-performing tech unicorn to go public in 2024, rising over 200% since its debut, but other tech names including Ibotta have struggled. “None of these IPOs were successful enough, or relieved enough market hesitation, to entire more startups to leave the sidelines,” the report says.