Silicon Valley Bank’s collapse is just the latest example of how a historic slowdown in IPOs is producing a minefield of unexpected consequences.

The shuttered market for US initial public offerings — and the resultant lack of proceeds for cash-strapped firms — has created myriad complications for Corporate America. From contributing to the collapse of a bank to sparking compensation issues at startups like Stripe Inc., the least predictable consequences of the past year’s IPO slowdown are proving to be the most damaging.

“When you’re not able to exit these companies, the whole thing falls apart,” said Robert Cote, chief executive officer of Cote Capital. “It’s a bigger, systemic problem.”

At SVB, funds from equity offerings once served as a primary source of deposit growth. Bridge loans issued by the bank effectively required funding rounds to happen on schedule and at higher valuations for them to be repaid. But as IPOs vanished, the slowdown in both deposit growth and loan repayments exposed vulnerabilities in the bank’s business model that sparked a global bout of risk aversion.

Read more: SVB Crisis Exposes Lurking Systemic Risk of Tech Money Machine

The drought in offerings is starting its second year with little sign of improving anytime soon. US IPOs have raised just $2.4 billion in 2023, according to data compiled by Bloomberg that excludes special purpose acquisition companies. That’s 43% less than this point last year and a 95% drop from the $48 billion raised during the same span in 2021.

While an economic downturn was perhaps inevitable sooner or later, the duration of the IPO market’s doldrums is creating problems that companies hadn’t considered to be realistic, advisers say.

“We’ve been stalled for more than a year,” said Patricia Adams, a partner at Vinson & Elkins LLP. “It caught people off guard because they didn’t expect to not have the ability to IPO in this amount of time.”

Surprise Bills

Before the bank run, IPO candidates like payments software maker Stripe found themselves dealing with the consequences of a shuttered listings market. One of the world’s most valuable startups, Stripe has been exploring options to raise liquidity to address a $3.5 billion tax bill stemming from its longer-than-expected path to the public market.

Employees who get paid in restricted stock units — a common form of compensation at startups — could lose that equity if their units expire before a change of control, such as an IPO. Those expirations, which typically happen seven years after the units are issued, could mean a loss of equity for employees. But waving the expiration triggers personal tax liabilities.

“I don’t think they expected the IPO market to get turned off the way it did,” said Ian Sherwin, a partner at Reed Smith LLP. “They probably thought there was no universe where they wouldn’t go public in that window before the drop-dead date and were left scrambling.”

A spokesperson for Stripe declined to comment.

Other IPO candidates are likely facing similar problems, according to Sherwin and Adams. “Startups don’t normally have cash on hand to pay employees, so this is one of the main tools they use to attract talent and maintain employees,” Adams said.

The missing windfalls have created another headwind for an economy that could be heading into recession. Proceeds from IPOs are typically used to scale-up businesses by creating jobs and paying for new infrastructure. They also fund medical research, debt repayment and merger activity.

Other consequences of the IPO slowdown include less earnings data at a time of uncertainty about the health of corporate balance sheets, plus a slump in underwriting revenue that’s held back the performance of banking stocks and the indexes to which they belong.

With the Cboe Volatility Index — a gauge that’s closely watched by investment bankers — trading above the critical 25 handle, the outlook for a recovery in IPOs remains uncertain. Until that improves, more surprises could be in store.

“These companies are built to either go public or be sold,” Adams said.

–By Drew Singer (Bloomberg)