Arm, Instacart, and Klaviyo all currently have stock prices hovering near their original share offerings, indicating a lack of enthusiasm among public investors in new tech ventures. Following a period of 21 months with very limited tech IPOs, investors have become more wary of taking risks due to rising interest rates. Eric Juergens, a partner at Debevoise & Plimpton with expertise in capital markets and private equity, commented on the situation,"Investors are concerned about valuations."
After a 21-month hiatus, the tech IPO market has once again become active in the past week. However, the early outcomes may not be encouraging for late-stage startups that are yet to make the leap. Last Thursday, chip designer Arm, followed by grocery-delivery company Instacart on Tuesday and cloud software vendor Klaviyo the next day, all made their debuts on Wall Street. Although these three ventures are in diverse parts of the tech industry, their reception was identical. Those who acquired the shares at the IPO price made gains if they sold right away, while most others were in the red. This situation is satisfactory in case the object of a company is to simply become public and allow for employees and early investors to get capital gains. But for the majority of companies planning to go public, the situation provides insufficient incentive.
Eric Juergens, a partner at Debevoise & Plimpton, specializing in capital markets and private equity, commented on this saying that people are anxious about valuations. The performance of these three companies over the next couple of months will signify how investors will value companies that are aiming to go public. According to Juergens, the market is likely to further open up in the first half of 2024 due to influence from investors, employees and the necessity to come up with financing in a high-interest environment.
Closing on Thursday, Arm's shares were at $52.16, slightly above their IPO cost of $51. Instacart had a 40% spike upon sale of shares at $30, however it settled at a 12% increase by the end of the day, and nearly all of that had been reversed the next day. It ended Thursday at $30.65. Klaviyo began at a 23% rise, but eventually ended the first day with a 9% profit, finally closing at $33.72. Not even the hope of a big surge in the market was achieved, hence the collective ‘meh’ among Wall Street. Instacart CEO Fidji Simo conceded that their IPO wasn't about attempting to attain optimum pricing and only 5% of existing shares were sold, with the rest being disbursed among founders, early employees, past staff, and other existing investors.
Simo informed CNBC's Deirdre Bosa that providing employees with liquidity was of paramount importance; thus, the IPO was not about the company's gain, but to give hardworking staff the opportunity to benefit from stock. Even though there was no perfect market window, Instacart raised capital in 2021 at a $39 billion valuation from leading investors such as Sequoia Capital, Andreessen Horowitz and T. Rowe Price. As the tech market was affected by the pandemic, Instacart had to reduce its valuation and shift focus to generate cash as interest rates increased and investments shifted away from risk.
The combined impacts of Covid delivery growth, low interest rates, and the protracted tech bull market led to an unsustainable boom for Instacart and other online, software, and e-commerce companies. It is now only a matter of time before this bubble bursts. Klaviyo, a business offering marketing automation tech, hit a peak evaluation of $9.5 billion in 2021, but only managed to get an IPO evaluation just below that. CEO Andrew Bialecki stated that the firm was not under any pressure to go public, mentioning to CNBC that "We've got a lot of momentum as a business. Now is a great time for us to go public especially as we move up in the enterprise. There really wasn't any pressure at all." The company's revenue saw a 51% increase from the past year to $165 million, and the firm has switched to a profitable status, having earned nearly $11 million in net revenue after previously losing $11.7 million in the past period.
Despite avoiding a major down round, Klaviyo had to drastically increase its revenue and turn a profit over the course of two years in order to keep its valuation. "We think companies should be profitable," Bialecki said. "That way you can be in control of your own destiny." Although having profitability is essential for conveying sustainability, investors in the tech industry during the record IPO years of 2020 and 2021 focused more on buying stock based on future sales as opposed to potential earnings. Cloud software and infrastructure businesses were in the process of growing quickly, which was heavily subsidised by venture firms and large asset managers, encouraging them to invest heavily in sales reps and burn through cash to get their products in their customers' hands. Simultaneously, consumer-side startups raised huge funds to invest in advertising and, in the case of gig economy companies like Instacart, attract contractors. Instacart had been proactive in bringing down its valuation to try and adjust investor and employee expectations, whilst Klaviyo had grown substantially to keep up with its lofty price. For instance, payments software developer Stripe reduced its valuation by almost half to $50 billion, and design software startup Canva saw its valuation decreased by 36% to $25.5 billion. Private equity firms and venture capitalists are in the business of making money off their investments, so eventually their portfolio companies need to hit the public market or get purchased. Unfortunately, for founders and management teams, being public entails a possible erratic stock price and having to update investors every quarter. Looking at the reception of the notable tech IPOs since late 2021, there may not be much reward for the stress. Aswarth Damodaran, a professor at New York University's Stern School of Business, remarked that with all the scepticism in the market, the latest IPOs are performing reasonably well due to the fact that there was a genuine possibility of them dropping 20 to 25 percent when they went public. "At one level the people pushing these companies are probably heaving a sigh of relief because there was a very real chance of catastrophe on 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 stays above the offer price two weeks from now, I think these companies will all view that as a win."
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