Meghan Day

Principal Solution Designer

IPO Failures: Causes, consequences and prevention

When the hype over a new business or product doesn’t meet its expectations, the excitement quickly wanes, and the possibility of an initial public offering (IPO) failure looms. Even when an initial public offering (IPO) starts out strong, it can lose money on the first day of going public or several days after and, eventually, fail.

42% of IPO companies were profitable in 2023. While a higher proportion than in years past, this still means that more than half of IPOs don’t generate a return, and how significant that margin is depends on the region. Globally, IPO companies’ median net profit margin was 8% in 2023, but in the U.S., it was —5%.

The reality is that under the right circumstances, even a solid IPO can fail. However, there are a variety of options to help them survive. To help navigate the IPO process, we’ll explain:

• What it means when an IPO failures
• Common causes of IPO failures
• What happens after an IPO fails, and tips for raising revenue
• Examples of failed IPOs
• Strategies to avoid IPO failures
• How technology streamlines the IPO process

What does it mean when an IPO fails?

When an IPO fails, it means the company’s stock price falls below the initial opening price it set. The share price can increase the next day if trading surges, but it can continue to drop — or even lose value entirely. Companies will generally consider their IPOs a failure if:

• Stock prices decline: If the stock price never recovers to the initial opening price, the market may not value the company as expected.
• Trading is low: Frequent trading and enthusiasm are marks of a successful IPO. If investors aren’t interested and abstain from trading, a failure may be on the horizon.
• Market sentiment is poor: Companies want investors, the media and more to be excited about the offering. If media coverage, analyst reviews and broader investor sentiment are all negative, the IPO could be labeled a failure.
• The company struggles post-IPO: Companies can still fail after the IPO. If they don’t meet financial projections or achieve profitability, they may still be viewed as failures.

Though the above scenarios are the most common, an IPO failure can occur even for companies that don’t go public. Some companies also consider an IPO a failure if they scrape their plans to go public because of internal strife or investor disinterest after the roadshow.

Common causes of IPO failures

IPOs can fail for many reasons — some of which are easier to foresee than others. If an IPO does fail, though, these are the most common culprits:

• Lack of investor confidence or interest: Investors purchase stock when they believe in the company’s business model, prospects or financial health. If investors have concerns about any of the above, they may opt not to purchase stock, which ultimately contributes to low demand and poor stock performance.
• Overvaluation: Investors may view a stock as overvalued at its IPO, meaning it is too expensive relative to its potential. The market will correct the valuation, leading to a decline in stock price and a failed IPO.
• Market timing and conditions: If a company goes public during an economic downturn, political instability or other unfavorable conditions, investors may view the IPO unfavorably. Even well-known companies have struggled after going public during a market slump.
• Weak financial performance: Slow revenue growth, high losses, or unmanageable debt may dissuade investors from supporting the IPO. Financial instability can significantly reduce the chances of a successful IPO.
• Negative public perception: Reputation matters during an IPO. Controversies, negative coverage or investor skepticism can all harm the IPO’s performance by decreasing the demand for stock.
• Poor corporate governance or leadership: Investors want to see that a company’s leadership is experienced, trustworthy and capable of executing its strategy. Poor leadership can deter investors from purchasing stock.
• High competition: Investors are attracted to IPOs with a high potential to gain or maintain market share. If the company operates in a competitive market, investors may be reluctant to support it.
• Regulatory or legal challenges: Regulatory scrutiny, compliance missteps and legal challenges can cast doubt on the company’s prospects and prevent investors from participating in the IPO.
• Low investor confidence: How does an IPO fail despite being a popular stock? While a well-known company with popular stock should succeed, the IPO can flounder if investors don’t believe in it. Weak business fundamentals, inflated valuations, and unfavorable market conditions can all erode investor confidence in its long-term success.

What happens when an IPO fails?

The hope for companies going public is that everyone makes money. When it's successful, an IPO raises lots of money to keep the business going. The founders also usually get a nice payday as they sell their private shares. What happens when the unthinkable happens: the company fails to sell enough shares to sustain itself?

• Capital and cash flow challenges: A failed IPO can torpedo the company’s valuation, eventually making it difficult to raise capital. Lenders and investors may also expect higher returns to balance the higher perceived risk. In either scenario, the company can face cash flow challenges that force it to delay or eliminate growth.
• Operational setbacks: An IPO roadshow can significantly drain a company’s resources. If that company doesn’t regain any of that capital post-IPO, it can strain operations and scale back strategies already in the works, like expansion plans or product launches.
• Reputational damage: Investors, customers and partners can lose confidence in a company after its IPO failure. Negative press coverage can further erode public perception of the company and make it harder to engage critical stakeholders.
• Reduced ability to attract talent: Most top talent want to work at winning companies. Potential employees may view a failed IPO as a sign of instability or poor prospects, while existing employees may lose motivation and consider leaving.
• Vulnerability to takeovers: Companies that lose value become prime targets for acquisition. If the company gets acquired, it can lose independence and alter its structure, leadership, and strategic direction.

Ways to raise revenue for failing IPOs

Most companies have raised venture capital at some point in the past. It doesn’t hurt to ask current investors if they would be interested in participating in an additional round of funding. Alternatively, the company could reopen the last round of venture capital raised and add new funding. One of the investment banks that backed or sponsored an IPO might also be interested in investing in the company once the IPO is put off.

Owners may be able to take out a private loan, which doesn’t require them to give up a stake in the company. This gives owners more control over decision-making. Similarly, a revolving credit line can be useful if the company doesn’t need major funds for expansion. The bank releases additional funds as the company pays them back.

It may also be possible to get a government grant. The benefit of this is that you don’t have to pay it back. Since you’ve done all the paperwork for the IPO, you’d have all the financial information readily available.

Another popular alternative is to sell the company. This will help cash out investors and provide a nice retirement for founders. The purchase price would help to fund growth and allow for a surplus. Sellers may allow founders to stay on and manage the business if they choose, or the company may grant them stock.

Finally, a failing IPO could actually buy another company that is a competitor or that is related. The incoming cash might be enough to meet the fundraising needs. To make this work, the company would need to look for investors who specialize in providing money for mergers and acquisitions. Once again, the initial IPO documentation will be a great asset in finding an interested investor.

Examples of failed IPOs

In the centuries since the Dutch East India Company first went public in Amsterdam, many IPOs have failed — some more memorably than others. The following list includes common examples of IPO failures that made headlines.

1. Telecommunications, 2006: This telecommunications provider went public at $17 per share, selling 31.25 million shares on the New York Stock Exchange (NYSE). However, by the end of the trading day, shares dropped 12.7% to just $14.85 — the worst IPO trading day in 2006.
2. Online marketplace, 2015: This online platform for artists and makers had a successful IPO day but failed days after. Its stock price surged from $16 to $27, raising $267 million on the first trading day. Despite its $1.8 billion valuation, shares later dropped under $10, shorting the company’s success.
3. Rideshare company, 2019: This widely anticipated IPO set a share price of $45 to meet its expected valuation of $120 billion. It ultimately opened at $41 and closed at $42, underperforming expectations and joining the ranks of IPO failures.
4. Mattress company, 2020: This company targeted $17 to $19 per share, but shares traded at just $12 on opening day. The IPO led to a $470 million valuation that missed the mark of the $1.1 billion expectation.

Strategies to avoid IPO failures

Many companies enter IPO season, optimizing for IPO success rather than avoiding IPO failure. But the reality is that careful planning, preparation and execution can help you sidestep the pitfalls that commonly cause IPOs to fail. To prevent IPO failure:

1. Establish a solid financial foundation: Companies with a strong track record of revenue growth and sound financial management are more attractive to investors. If your balance sheets and financial history demonstrate profitability and favorable growth prospects, it will be easier to win investor support.
2. Have transparent governance: Strong governance structures are essential before you decide to go public. An experienced board, a clear code of conduct, and rigorous accounting practices will put investors at ease. This includes adhering to all legal and regulatory requirements before, during and after the IPO.
3. Learn from the mistakes of others: Before your IPO, analyze IPOs that failed in the past within and outside of your industry. Understanding where they went wrong can help you avoid the same mistakes or identify strategies that could be successful. Likewise, financial advisors with a track record of IPO success can have valuable guidance for navigating the IPO process.
4. Choose the right timing: Like in most things, timing is everything in an IPO. Monitor market conditions and attempt to go public when the economy is stable and investors are optimistic. Timing the market can be difficult and sometimes impossible, so pay attention to industry trends; if sentiment changes for the better, your IPO is more likely to succeed.
5. Set a realistic valuation: In the examples above, several companies failed after IPOs because they were valued below their own expectations. Avoid overpricing your stock, as this can decimate demand and erode your post-IPO stock prices. An experienced financial advisor can help set an appropriate valuation.
6. Build investor relationships: Companies that win the favor of institutional investors, analysts and financial media pre-IPO can generate interest and support. This early engagement allows you to gauge investor sentiment and adjust your strategy accordingly. Additionally, the more open you can be with investors, the easier it will be to build enthusiasm.
7. Emphasize long-term growth: IPO success is essential, but long-term growth matters most. The example companies above all struggled during IPO but have gone on to lead their respective industries. As such, don’t overlook the importance of articulating your long-term growth strategy and how that will create sustained value for shareholders.

Get on the road to IPO success

IPO failures are a risk any company must take, but they aren’t inevitable. Unrealistic valuations, poor business fundamentals and unfortunate timing can each erode IPO performance. However, there are just as many indicators that an IPO can be successful — if you know what they are and how to leverage them to your benefit.

Our seven-step IPO roadmap outlines how to avoid IPO failures and the most important things any company can do to go public successfully. Download the checklist today to set yourself up for success during your IPO and beyond.