Instacart will celebrate its IPO on Nasdaq on September 19, 2023.
Provided by: NASDAQ
The market has cracked in the past week after a 21-month freeze on tech IPOs. But early results are not encouraging for late-stage startups that remain on the sidelines.
Chip designer Arm made its debut last Thursday, followed by the grocery delivery company instacart This Tuesday, Cloud Software Vendors Claviyo the next day. Although these are his three companies in very different areas of the tech space, Wall Street’s reaction has been consistent.
Investors who buy at the IPO price can make money if they sell immediately. Almost everyone else is in the red. If a company’s goal is simply to go public and create liquidity opportunities for employees and early investors, that’s fine. But for most companies in planning, especially those with enough capital on their balance sheets to remain private, that holds little appeal.
“People are worried about valuations,” he said. Eric Jurgens, a partner at the law firm Debevoise & Plimpton, with a focus on capital markets and private equity. “Seeing how these companies trade over the coming months will reflect how the IPO market and stock markets more generally value them, as well as how comparable companies seeking to go public This will be important in understanding how they are being evaluated.”
Jurgens said that based on conversations with companies, the market is likely to open up further in the first half of next year, simply due to pressure from investors and employees, and the need to raise capital.
“At some point, companies need to go public, whether it’s because of PE funds looking for an exit, employees looking for liquidity, or simply the need to raise capital in a high interest rate environment,” he said.
Arm, owned by Japan’s Softbank, saw its stock rise 25% on its first day of trading, closing at $63.59. Since then, the stock has fallen every day, closing Thursday at $52.16, just above the IPO price of $51.
Instacart soared 40% shortly after selling its stock for $30. However, by the end of the first day of trading, the gain was only 12%, and almost all of that gain was wiped out by the second day. Shares rose 1.8% on Thursday to close at $30.65.
After rising 23% on Wednesday’s first trade, Klaviyo sold throughout the day and closed at $32.76, just 9% above its IPO price. It rose 2.9% to $33.72 on Thursday.
None of these companies expected a blockbuster hit. In the era of frothy zero interest rates in 2020 and 2021, the first-day spikes were so dramatic that bankers were criticized for handing out free money to fellow buyers, and companies were left with too much cash. was criticized.
But the lack of excitement over the past week, which has led to a collective “so-so” sentiment across Wall Street, is certainly not a desired outcome either.
Instacart CEO Fiji Simo acknowledged that the company’s IPO was not about optimizing the company’s pricing. Instacart sold just 5% of its outstanding shares in the offering, with co-founders, early employees, former staff and other existing investors selling an additional 3%.
“We felt it was very important to give our employees liquidity,” Simo told CNBC’s Deirdre Botha in an interview after the company went public. “This IPO is not about raising money for us. It is actually about ensuring that all our employees work hard and have liquidity in our shares. was not looking for the perfect market window.”
Perhaps this window wasn’t perfect for Instacart. At the peak of the technology market in 2021, Instacart was backed by Sequoia Capital, Andreessen Horowitz, T. Rowe Price.
During last year’s market crash, Instacart had to slash its valuation multiple times and switch from growth mode to profit mode to ensure it generated cash as interest rates rose and investors retreated from risk. Ta.
The combination of the coronavirus delivery boom, low interest rates and a decade-long bull market in the tech industry has pushed Instacart and other internet, software and e-commerce businesses to unsustainable heights. The only thing left to do is decide when to take the medicine.
Klaviyo, which provides marketing automation technology to businesses, didn’t get as hot as some other companies in the industry, reaching a peak valuation of $20 million. $9.5 billion The company’s IPO valuation is slightly below that, and CEO Andrew Bialecki told CNBC that the company is under no pressure to go public.
“We have great momentum as a company, and this is a great time to go public, especially as we move up within the company,” Bialecki said. “There was really no pressure at all.”
In the latest quarter, Klaviyo’s revenue increased 51% year-over-year to $165 million, and the company returned to profitability with net income of nearly $11 million, compared to a loss of $11.7 million in the same period last year. Ta.
Although it avoided a significant down-round, Klaviyo needed to grow its revenue by about 150% and become profitable over two years to roughly maintain its valuation.
“We believe that companies should be profitable,” Bialecki said. “Then you can control your own destiny.”
Profitability is a good indicator of sustainability, but it wasn’t what tech investors cared about during the record IPO years of 2020 and 2021. The valuation was based on a multiple of future sales at the expense of potential earnings.
At the time, cloud software and infrastructure businesses were in the midst of a land grab. Start-ups and large asset managers subsidize their growth by encouraging them to hire large numbers of salespeople and burn large amounts of cash to get their products into customers’ hands. Ta. On the consumer side, startups have raised hundreds of millions of dollars to pour into advertising, and in the case of gig economy companies like Instacart, seduce contract workers Choose them over the competition.
Instacart aggressively lowered its valuation to reset investor and employee expectations. Klaviyo has grown to be expensive. Highly valued companies that are still private include payment software developer Stripe, which has had its valuation nearly halved to $50 billion, and design software startup Canva. lowered the rating Secondary transactions rose 36% to $25.5 billion.
Private equity firms and venture capitalists are in the business of making money on their investments, so ultimately they must take their portfolio companies to the public market or acquire them. But for founders and management teams, going public means the stock price can fluctuate and they need to provide updates to investors on a quarterly basis.
Given how Wall Street has received the first high-profile tech IPOs since late 2021, there may not be much return for all that hassle.
Still, Aswath Damodaran, a professor at New York University’s Stern School of Management, said recent IPOs have been doing well despite a lot of skepticism in the market, which initially threatened to drop 20% to 25%. .
“In some ways, the people driving these companies can breathe a sigh of relief because there was a very real possibility of disaster happening to these companies,” Damodaran said Wednesday on CNBC’s “Squawk Box.” “I think he’s following the rules,” he said. “We feel this will take a week or two to materialize. But if the stock is still above the offering price after two weeks, all of these companies will consider that a win.”
clock: New York University professor explains why he doesn’t trust SoftBank-backed IPO