Title: Lackluster Response to Tech IPOs Raises Concerns for Late-Stage Startups
The recent initial public offerings (IPOs) of Arm, Instacart, and Klaviyo have failed to generate the expected enthusiasm from investors. After a 21-month tech IPO freeze, these companies ventured into the market with high hopes. However, while those who sold immediately after buying at the IPO price made profits, most other investors are currently facing losses. This lackluster response has raised concerns among late-stage startups that were considering going public.
Valuation Worries and Market Pressure
Eric Jurgens, a partner at law firm Debevoise & Plimpton specializing in capital markets and private equity, believes that valuations are a major concern for investors. The performance of these recently listed companies will serve as an indicator of how the stock market values similar firms planning to go public.
Jurgens anticipates that market pressure from investors and employees, along with financing needs, will likely push more companies to go public in the first half of 2024. While some startups may prefer to remain private due to their strong financial position, various factors such as liquidity needs or the desire to raise capital in a high-interest rate environment may force them towards an IPO.
Mixed Results for Recent Tech IPOs
Arm’s shares initially soared by 25% on its first day of trading but have since fallen steadily. Instacart experienced a significant jump of 40% immediately after selling shares at $30 but saw its gains diminish rapidly on the second day. Klaviyo had a promising start with a 23% rise during its first trade but closed just 9% higher than its IPO price.
While these companies did not expect astronomical gains like those witnessed during the peak years of tech IPOs in 2020 and 2021, their lackluster performance is far from ideal.
Instacart’s CEO, Fidji Simo, acknowledged that their IPO was not aimed at optimizing prices but rather providing liquidity to employees. The company only sold a small percentage of outstanding shares in the offering, with most selling coming from existing investors. Instacart’s previous valuation cuts and shift towards profitability during the market crash of 2020 reflect the challenges it faced in maintaining its market position.
Klaviyo, on the other hand, had a more stable growth trajectory and reached profitability. Its revenue rose by 51% in the latest quarter compared to the previous year, and it generated net income after previously reporting losses. Klaviyo’s CEO Andrew Bialecki stated that there was no pressure for them to go public as they had strong business momentum.
Profitability vs. Valuations
The recent lackluster response to tech IPOs highlights a shift in investor priorities. During the peak years of tech IPOs, valuations were based on future sales potential rather than immediate profitability. However, investors now seem to favor companies that can demonstrate sustainability through profitability.
While profitability is essential for long-term success and control over one’s destiny, it does not align with what technology investors valued during previous IPO years. Companies were encouraged to prioritize growth at any cost and burn cash on aggressive marketing campaigns.
Late-stage startups considering going public are closely watching how recent tech IPOs fare in the stock market. The tepid response from investors raises concerns about valuations and whether companies can meet market expectations.
Despite these reservations, Aswarth Damodaran, a professor at New York University’s Stern School of Business, believes that considering the skepticism surrounding these IPOs, their performance has been relatively commendable so far. If stock prices remain above their offer price after a couple of weeks, it will be seen as a win for these companies.
As late-stage startups continue evaluating their options for going public or remaining private, it is crucial to carefully consider market conditions and investor sentiment. The IPO window may never be perfect, but companies must assess their financial needs, employee liquidity requirements, and long-term growth prospects before making this critical decision.
It is confirmed that: (CNBC)(https://www.cnbc.com/2023/09/21/tech-ipos-get-meh-response-from-wall-street-arm-instacart-klaviyo.html)