The Tech IPO Market Opens Up, but Early Results Disappoint
After a 21-month freeze, the tech IPO market has finally started to show signs of activity. However, the initial performance of recent IPOs has not been encouraging for late-stage startups. Last week, chip designer Arm, grocery delivery company Instacart, and cloud software vendor Klaviyo made their market debuts. While these companies operate in different sectors, they have all experienced a consistent reaction from Wall Street.
Investors See Returns, Others Face Losses
Investors who bought shares at the IPO price and sold immediately have made money. However, for everyone else, the results have been disappointing. This may not be an issue for companies looking to go public solely for the purpose of providing liquidity to employees and early investors. But for most companies, especially those with enough capital to remain private, the lackluster performance is not attractive.
Eric Juergens, a partner at law firm Debevoise & Plimpton, believes that the market will continue to open up in the first half of next year due to investor and employee pressure, as well as financing requirements. Companies eventually need to go public for various reasons, such as PE funds looking to exit, employees seeking liquidity, or the need to raise capital in a high interest rate environment.
Mixed Performance of Recent IPOs
Arm, controlled by Japan’s SoftBank, saw its shares surge 25% on the first day of trading before declining in subsequent days. Instacart experienced a 40% increase immediately after selling shares, but the gain was mostly wiped out on the second day. Klaviyo had a 23% rise on its first trade and closed slightly higher than its IPO price.
However, none of these companies were expecting a significant pop in their stock prices. The lack of excitement in the market over the past week is not the desired outcome either. Instacart CEO Fidji Simo stated that the IPO was not about optimizing pricing but providing liquidity to employees. The company only sold a small portion of outstanding shares in the offering.
Valuations and Profitability
One concern in the market is over valuations. Many companies reached unsustainable heights during the tech market peak driven by the Covid delivery boom, low interest rates, and a bull market in tech. Instacart had to lower its valuation multiple times to ensure it could generate cash and become profitable. Klaviyo, on the other hand, managed to grow into its valuation by increasing its revenue and achieving profitability.
While profitability is crucial for sustainability, it wasn’t a top priority for tech investors during the record IPO years of 2020 and 2021. Valuations were based on future sales, often at the expense of potential earnings. Now, with skepticism in the market, recent IPOs are being cautiously received. Aswarth Damodaran, a professor at NYU’s Stern School of Business, believes that if the stock prices of these companies remain above the offer price in the coming weeks, it will be considered a win.
