- Arm, Instacart and Klaviyo are all trading near their IPO prices, showing a lack of enthusiasm among public investors for new technology opportunities.
- The tech IPO market was largely closed for 21 months as investors turned away from risk amid rising interest rates.
- “People are worried about valuations,” said Eric Juergens, a partner at law firm Debevoise & Plimpton, who focuses on capital markets and private equity.
Instacart will celebrate its IPO on Nasdaq on September 19, 2023.
After a 21-month standstill in technology IPOs, the market reopened last week. But early results may not be encouraging for late-stage startups that are on the sidelines.
Chip designer Arm debuted last Thursday, followed by grocery delivery company Instacart this Tuesday and cloud software provider Klaviyo the following day. These are three very different companies in different parts of the tech sector, but Wall Street’s reaction has been consistent.
Investors who bought at the IPO price made money if they sold immediately. Almost everyone else is in the red. That’s fine if a company’s goal is simply to be public and provide employees and early investors with an opportunity to obtain liquidity. But for most companies in the pipeline, particularly those that have enough capital on their balance sheet to remain private, it offers little appeal.
“People are worried about valuations,” said Eric Juergens, a partner at law firm Debevoise & Plimpton, who focuses on capital markets and private equity. “Seeing how these companies perform over the next few months will be important in seeing how IPO markets and stock markets in general value these companies and how they might value comparable companies looking to go public.”
Jürgens said, based on his conversations with companies, that the market is likely to open further in the first half of next year simply due to pressure from investors and employees, as well as financing needs.
“At some point, companies have to go public, whether it’s a PE fund looking to exit, or employees looking for liquidity, or just the need to raise capital in a high interest rate environment,” he said.
Arm, controlled by Japan’s SoftBank, saw shares rise 25% on its first day of trading, closing at $63.59. The stock has fallen every day since then, closing at $52.16 on Thursday, just above the IPO price of $51.
Instacart jumped 40% immediately after selling shares at $30. But by the end of the first day of trading it was up just 12%, and that gain was virtually wiped out on the second day. The stock rose 1.8% on Thursday to close at $30.65.
Klaviyo rose 23% in its first trading on Wednesday before selling off later in the day, closing at $32.76, just 9% above the IPO price. It rose 2.9% to $33.72 on Thursday.
None of these companies expected or even hoped for great success. In 2020 and 2021, during the hot zero interest rate days, the first-day jumps were so dramatic that bankers were criticized for handing out free money to their buy-side buddies and companies were criticized for holding too much cash on the left the table.
But last week’s lack of excitement – which amounted to a collective “meh” on Wall Street – is certainly not the desired result either.
Instacart CEO Fidji Simo admitted that her company’s IPO was not about optimizing prices for the company. Instacart sold only the equivalent of 5% of the offering’s outstanding shares, while co-founders, early employees, former employees and other existing investors sold an additional 3%.
“We thought it was really important to provide liquidity to our employees,” Simo told CNBC’s Deirdre Bosa in an interview after the offering. “For us, this IPO is not about raising money. It’s more about ensuring that all employees have liquidity for stocks they work very hard for. We weren’t looking for a perfect market window.”
Chances are, the window for Instacart was never going to be perfect. At the tech market’s peak in 2021, Instacart raised $39 billion in capital, or $125 per share, from blue-chip investors including Sequoia Capital, Andreessen Horowitz and T. Rowe Price.
During last year’s market downturn, Instacart had to cut its valuation several times and switch from growth to profit mode to ensure the company could generate cash as interest rates rose and investors balked at the risk.
The combination of the Covid delivery boom, low interest rates and a decade-long bull market in tech drove Instacart and other internet, software and e-commerce companies to unsustainable heights. Now it just depends on when they take their medication.
Klaviyo, which provides marketing automation technology to businesses, never got as overheated as many in the industry, peaking at $9.5 billion in 2021. The IPO’s valuation was just below that, and CEO Andrew Bialecki told CNBC that the company was not under pressure to go public.
“We have gained a lot of momentum as a company. Now is a good time for us to go public, especially as we move up in the company,” Bialecki said. “There was really no pressure at all.”
Klaviyo’s revenue rose 51% year-over-year to $165 million in its most recent quarter, and the company returned to profitability, posting a net profit of nearly $11 million after reporting $11,000 in the same period last year. had lost $7 million.
Even though the company avoided a major downturn, Klaviyo needed to increase its revenue by about 150% within two years and become profitable to roughly maintain its value.
“We believe companies should be profitable,” Bialecki said. “This way you can be in control of your own destiny.”
While profitability is good evidence of sustainability, it wasn’t important to tech investors in the record IPO years of 2020 and 2021. Valuations were based on multiples of future sales at the expense of potential earnings.
Cloud software and infrastructure companies were in the midst of a land grab at the time. Venture firms and large asset managers subsidized their growth, encouraging them to leverage their sales force and burn through loads of cash to get their products into customers’ hands. On the consumer side, startups raised hundreds of millions of dollars to pour into advertising and, in the case of gig economy companies like Instacart, getting contract workers to choose them over the competition.
Instacart proactively lowered its valuation to redefine investor and employee expectations. Klaviyo has reached its high price. Among highly valued companies that are still private, payments software developer Stripe cut its valuation by almost half to $50 billion, and design software startup Canva saw its valuation fall 36% to $25.5 billion in a secondary transaction -Dollar lowered.
Private equity firms and venture capitalists are eager to profit from their investments, which is why their portfolio companies must eventually go public or be acquired. However, for founders and management teams, listing means a potentially volatile share price and the need to update investors on a quarterly basis.
Given that Wall Street has seen its first significant tech IPOs since late 2021, this effort may not be particularly worth it.
Still, Aswarth Damodaran, a professor at New York University’s Stern School of Business, said recent IPOs are doing well despite market skepticism amid fears they could fall 20% to 25% from the start.
“On one level, the people driving these companies are probably breathing a sigh of relief because there was a very real threat of disaster for these companies,” Damodaran told CNBC’s “Squawk Box” on Wednesday. “I have a feeling it will take a week or two for this to become noticeable. But if the share price stays above the offer price in two weeks, I think all of these companies will see that as a win.”
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