Not All Late‑Stage Companies Face the Same IPO Path
Consider this: The IPO market has changed considerably since 2020 and 2021, where most IPOs were in the software sector. That was no longer true in 2025, and likely won’t be true in the next year or two, because software companies, in particular, are facing a much higher bar to going public due to the perceived structural disadvantages of doing so in an AI-driven world.
At least at the moment, enterprises don’t appear to be reallocating their IT budgets from traditional software solutions to AI. Instead, their budgets are expanding to tap AI opportunities. Despite this, incumbent software companies are under growing pressure to demonstrate how they plan to accelerate or maintain growth in the face of AI-related disruptions. Absent definitive signals of success, investors remain cautious, especially as historical growth rates in the software sector have slowed from around 20% expected growth in 2021 (and even 30% for high-growth companies) to roughly 10% today.
Compare this to high-performing AI companies, some of which have quickly grown to $100 million or more in recurring revenue. As long as these companies have an AI solution rooted in actual customers and earnings, they will have a credible path to IPO at premium valuation multiples. The debate here is how durable—or ephemeral—their growth is, and right now, it’s too early to tell.
Access to Capital Shapes IPO Timing Decisions
Speaking of super-scale private companies: Those that have durable access to capital have the luxury to choose if, how, and when to go public. For these companies, the evolution of the secondary market has put more tools in their toolkit, allowing them to delay IPOs by conducting tender offers or secondary sales for their employees. This enables them to postpone pricing during periods of market volatility and potentially optimize their valuation by controlling their IPO timing.
Conversely, there are mid- to late-stage capital intensive companies whose need for capital surpasses what the private market can provide. These companies may need to go public for liquidity purposes, even if they’re not fully operationally ready.
Then there are the late-stage private companies that may be experiencing moderate growth or revenue acceleration and are evaluating whether to go public, pursue mergers and acquisitions (M&A), or arrange additional private rounds. The challenge they’re grappling with is the complexity of operating as a public company in a market that imposes real penalties for missed quarterly targets or poor execution.
Valuation Expectations Are Resetting
In general, IPO valuations this past year were lower than peak private rounds from roughly five years ago. We have seen several situations where IPO valuations were discounted relative to the last private round, although generally the market views value at IPO as a reset from what happened previously, so the discount has no bearing on performance of the IPO.
That said, the market-determined multiple is only one input that informs valuation. The other key components of the formula are overall company value and core earnings and revenue metrics. Companies that have a certain valuation expectation should set achievable earnings and revenue targets—and then hit those targets—in order to be awarded what’s considered a ‘fair’ valuation.
This can get somewhat muddled when secondary buyers anticipate the IPO and get more aggressive ahead of the offering. That tendency can see buyers overpay, fueling seller expectations for share prices. If the IPO market continues to expand this year, we might see a shift in favor of sellers. Yet, even then, late-stage private companies should understand IPO valuation alone can be a red herring. An IPO doesn’t mark the end of the journey—in many respects, it’s just the beginning.
Operating as a public company is hard, and it can be harder for companies that try to push valuations beyond marketplace expectations. Public markets tend to be more disciplined, weighing profitability trajectories, revenue quality, sustainable growth, and governance. This helps explain why private valuations may not align with public market pricing. Companies that optimize long-term financial outcomes—rather than relying solely on IPO negotiation tactics—are best positioned to drive meaningful value over time.
Why IPO Valuations Matter for Equity Compensation
One last thought on one of the unintended impacts of these trends: Because IPO valuations can affect equity compensation, from a workplace perspective, companies should benchmark their equity compensation levels against competitors in both public and private markets to be sure they remain competitive. This involves analyzing industry standards for equity grants and total compensation levels, which can provide insights into the right cash and equity mix for employees. Additionally, companies should organize their equity plan data to make sure it is up-to-date and accurate at the demographic, compensation expense, and ownership levels. Automations and integrations with existing HR and payroll systems can help maintain data accuracy, which is crucial for valuation purposes.
Educating employees about the value of their equity and how it will change post-IPO is also vital. This helps employees remain engaged and realize value from their equity holdings, which can positively impact the company’s valuation.
