- Arm, Instacart, and Klaviyo are all trading near their IPO price, showing a lack of enthusiasm among public investors for new technology opportunities.
- The technology IPO market has been largely shut down for 21 months, as investors turned away from risk as interest rates rose.
- “People are concerned about valuations,” said Eric Jurgens, a partner at law firm Debevoise & Plimpton who focuses on capital markets and private equity.
Instacart celebrates its initial public offering on the Nasdaq on September 19, 2023.
After a 21-month tech IPO freeze, the market opened last week. But the early results can’t be encouraging for any late-stage startup still on the sidelines.
Chip designer Arm made its debut last Thursday, followed by grocery delivery company Instacart on Tuesday, and cloud software vendor Klaviyo the next day. They’re three very different companies in disparate parts of the tech sector, but Wall Street’s reaction has been consistent.
Investors who bought at the IPO price would make money if they sold immediately. Almost everyone is in the red. It’s okay if the company’s goal is just to go public and create the opportunity for employees and early investors to obtain liquidity. But for most companies under construction, especially those with enough capital on their balance sheet to stay private, that offers little traction.
“People are worried about ratings,” he said. Eric Jurgens, a partner at the law firm Debevoise & Plimpton, which focuses on capital markets and private equity. “Seeing how these companies trade over the next couple of months will be important to see how the IPO markets and stock markets in general value these companies and how they might value similar companies looking to go public.”
Juergens said, based on his conversations with companies, that the market is likely to open up more in the first half of next year simply due to investor and employee pressures as well as financing requirements.
“At some point, companies need to go public, whether that’s a private equity fund looking to exit, employees looking for liquidity or just the need to raise capital in a rising interest rate environment,” he said.
Arm, which is controlled by Japan’s SoftBank, saw its shares rise 25% on the first day of trading to close at $63.59. Every day since then, the stock has fallen, closing Thursday at $52.16, just above its IPO price of $51.
Instacart shares rose 40% immediately after shares were sold at $30. But by the end of the first day of trading, the stock was up just 12%, and that gain was completely erased by the second day. The stock rose 1.8% on Thursday to close at $30.65.
Klaviyo shares rose 23% based on their first trade on Wednesday, before selling off throughout the day to close at $32.76, just 9% above their IPO price. It rose 2.9% on Thursday to $33.72.
None of these companies expected, or even hoped, for a major boom. In 2020 and 2021, during the frothy days of zero interest rates, the first-day jumps were so dramatic that bankers were criticized for handing out free money to fellow buyers, and companies were criticized for leaving too much cash on the table.
But the lack of excitement over the past week – amounting to a collective “oh my” across Wall Street – is certainly not the desired outcome either.
Fidji Simo, CEO of Instacart, admitted that her company’s IPO wasn’t about trying to improve pricing for the company. Instacart sold the equivalent of just 5% of its outstanding shares in the offering, with co-founders, early employees, former employees and other existing investors selling another 3%.
“We felt it was really important to give our employees liquidity,” Simo told CNBC’s Deirdre Bosa in an interview after the show. “This IPO is not about raising money for us. It’s actually about making sure that all employees can get liquidity from the shares they work so hard for. We weren’t looking for a perfect market window.”
The window will probably never be perfect for Instacart. At the peak of the tech market in 2021, Instacart raised capital at a valuation of $39 billion, or $125 per share, from A-list 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 shift from growth mode to profit mode to ensure it could generate cash as interest rates rose and investors retreated from risk.
The combination of the Covid delivery boom, low interest rates and a decade-long bull market in technology has pushed Instacart and other internet, software and e-commerce companies to unsustainable heights. Now it’s just a matter of when they take their medications.
Klaviyo, which provides marketing automation technology to businesses, hasn’t seen as much frenetic activity as many other companies in the industry, with its value skyrocketing. $9.5 billion in 2021. The IPO valuation was slightly lower than that, and CEO Andrew Bialecki told CNBC that the company was not under pressure to go public.
“We have a lot of momentum as a company,” Bialecki said. “And now is the right time for us to go public, especially as we move forward with the project.” “There was really no pressure at all.”
Klaviyo’s revenue increased 51% in the previous year’s fourth quarter to $165 million, and the company turned profitable, generating nearly $11 million in net income after losing $11.7 million in the same period a year earlier.
Even though it avoided a big down round, Klaviyo had to grow its revenue by about 150% over two years and achieve profitability to maintain its valuation around 100 percent.
“We believe companies should be profitable,” Bialecki said. “This way you can control your own destiny.”
While profitability is great for showing sustainability, that’s not what tech investors cared about during the record IPO years of 2020 and 2021. Valuations were based on multiple to future sales at the expense of potential profits.
Cloud software and infrastructure companies were in the midst of a land grab at the time. Investment firms and large asset managers were supportive of its growth, encouraging it to score big on salespeople and spend piles of cash to get their products into customers’ hands. 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, Lure contract workers To choose them over the competition.
Instacart was proactive in lowering its valuation to reset investor and employee expectations. Klaviyo has grown to its hefty price tag. Among the highly valued companies that remain private are payments software developer Stripe, which nearly halved its value to $50 billion, and design software startup Canva. reduced its value In a secondary deal, it increased by 36% to $25.5 billion.
Private equity firms and venture capitalists are in the business of making a profit from their investments, so their portfolio companies eventually need to reach the public market or be acquired. But for founders and management teams, being public means potentially volatile stock prices and the need to update investors quarterly.
Considering how Wall Street has had its first high-profile tech IPOs since late 2021, there may not be much reward for all the trouble.
However, Aswarth Damodaran, a professor at New York University’s Stern School of Business, said that despite all the market uncertainty, the most recent IPOs performed well because there was a fear that they might fall 20% to 25% out of the gate.
“On some level, the people who are pushing these companies are probably breathing a sigh of relief because there is a very real chance 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 play out. But if the stock price is still above the offer price two weeks from now, I think these companies will see that as a win.”
He watches: A New York University professor explains why he doesn’t trust SoftBank-backed IPOs
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