Two of the much-anticipated IPOs of highly valued tech startups, Instacart and Klaviyo, raised their initial public offering valuations following the large IPO of chip maker Arm last week. The marketplace for initial public offerings that has been stagnant for the last ten years appears to be recovering, which brings with it both new prospects for investors as well as all the dangers associated with any new stock. Most of the 73 IPOs (70%) up till now have been trading lower than their IPO price at the time of Arm's transaction, predominantly from smaller businesses.
As tech startups prepare to enter the IPO market again, they are raising their valuations. This follows the successful market debut of chip manufacturer Arm last week, with online grocery firm Instacart and marketing automation company Klaviyo set to go public this week. Despite the attempted revival of the post-2021 IPO market, the valuations of tech stocks are still noticeably lower. Challenges such as high inflation, rising interest rates, fears of banking sector instability and choppy markets are hindering the IPO resurgence and making it difficult to determine company worth. Nevertheless, Matt Kennedy, senior IPO market strategist for Renaissance Capital, is confident that this marks an important turning point, after the slowest IPO market in more than a decade. His views are mirrored by Ray Wang, principal analyst and founder at Constellation Research, who highlights that funding and investor sentiment for these types of investments is declining, with much uncertainty as to how companies will perform.
Debuting in an uncertain market has meant that companies and investors have had to accept lower valuations than those seen two years ago when the IPO market was flourishing. On Friday, Instacart raised its target valuation to up to $10 billion from up to $9.3 billion due to Arm's successful debut. This is still lower than the grocery company's $39 billion valuation from 2021, representing a 75% decrease for venture capital investors. Klaviyo has set the target of up to $9 billion on a fully diluted basis, only marginally less than its 2021 valuation of $9.5 billion. A rise in the Federal Reserve's interest rate, the global economy's fragile condition, and the lack of IPOs since 2021 have also had a negative impact on valuations, as per Wang.Instacart profileFortunately, Kennedy believes that valuations are now appearing to be more "reasonable" compared to two years ago. He stated that investors have become more focused on profitability, which has been taken into account by companies. As such, the tech industry has taken the past two years to improve profitability before coming to market, and still maintain growth while pitching a reasonable valuation. Instacart is a great case of this, now appearing more like a value stock rather than a money-losing high-flying tech startup.
Kennedy noted that Instacart and Klaviyo have seen solid growth similar to what was observed two years ago, and critically, are not burning cash. Stanford, lead VC analyst at PitchBook, pointed out that this could be an indicator of the future of venture capital-backed companies and tech IPOs, even those that are profitable. Kennedy believes that the opportunity for tech IPOs will have a slow progression throughout the year, gaining more momentum by early 2024.
When it comes to investing in IPO stocks, Kennedy advised not to chase the crowd, but be aware of what that means, and develop an exit strategy. He added that often it's best to wait until after the initial excitement surrounding an IPO subsides. Both Kennedy and Stanford highlighted that these tech IPOs are risky and, in order for the IPO market to thrive, companies must display sustained growth, profitability, and a decent valuation.
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