Tech IPOs are resurging after a 20-month lull, with Instacart, Klaviyo, and Arm leading the charge. These offerings test public market interest. Instacart’s valuation decline contrasts with Klaviyo’s steady growth. Arm seeks a $32 billion valuation with its unique history. The market’s recent dynamics and the scarcity of notable tech IPOs motivate firms. As the Nasdaq’s performance wavers, firms must focus on market value and prove themselves post-IPO.
Tech Initial Public Offerings (IPOs) are making a resurgence, but their success is now under scrutiny. After a hiatus of 20 months without a notable venture-backed tech firm going public in the U.S., the focus in Silicon Valley has shifted to who will lead this charge. Last week, Instacart, a grocery delivery startup, and Klaviyo, a data and marketing automation company, filed for their stock market debuts.
In the same week, Arm, a chip designer owned by Japan’s SoftBank, announced its plans to re-enter the Nasdaq after seven years of being privately held following a $32 billion acquisition.
While these three companies have distinct profiles, they collectively pose a litmus test for the level of enthusiasm among public market investors for fresh investment opportunities. Depending on their initial performances, their market debuts could encourage other ventures to follow suit in the fourth quarter.
Lise Buyer, the founder of IPO consultancy Class V Group, noted that these debuts could motivate other management teams to expedite their IPO plans, moving beyond the expectations of yesteryear’s soaring valuations in 2020 and 2021, which were unprecedented for tech IPOs. For instance, Snowflake, a software vendor that went public in late 2020, experienced an initial price-to-sales multiple surges to about 50, but it now trades at around 17 times revenue. Similarly, DoorDash’s stock has declined by more than two-thirds from its peak in 2021, despite a subsequent 60% growth in revenue.
Buyer indicated that the market won’t return to the high valuations seen in 2021 anytime soon.
Instacart, previously backed at substantial valuations by venture firms like Sequoia and Andreessen Horowitz, has had to significantly lower its valuation before its IPO. After securing funds at a $39 billion valuation in early 2021, the company reduced it to $24 billion in March of the following year due to market shifts and slower growth post-Covid. Reports suggest that the valuation further plummeted by 50% by late 2022. In comparison to Instacart, DoorDash, which is a comparable company, currently trades at 3.8 times its revenue. Applying this multiple would value Instacart at approximately $11 billion.
Instacart, which reported a 15% revenue growth in the latest quarter, amounting to $716 million, has consistently turned a profit for five consecutive quarters through careful cost management and workforce reduction. Its net income has surged from $8 million to $114 million year-over-year.
Klaviyo, valued at $9.5 billion in a 2021 funding round, hasn’t had to revise its valuation downwards. The company, established in 2012, specializes in helping clients store user data for targeted marketing across various channels like email and text messages. Despite its relatively lesser-known brand, Klaviyo is growing at a significantly faster pace than Instacart, achieving a 50% revenue increase in the second quarter to $164.6 million. It transitioned from a loss of nearly $12 million to a profit of $10.9 million in the same period the previous year.
In terms of comparable benchmarks, the Bessemer Cloud Index, consisting of about 70 publicly traded cloud companies, provides useful insights. Klaviyo’s growth rate positions it near the top of the index, where companies trade at around 12 times revenue. This suggests a valuation of approximately $7 billion for Klaviyo.
Summit Partners is the primary institutional supporter of Klaviyo, followed by e-commerce software vendor Shopify and venture firm Accel.
According to Buyer, the current wave of companies filing for IPOs is expected due to regulatory requirements. After filing for an IPO, management teams and bankers need to wait a minimum of 15 days before starting their roadshow, which could lead to the actual offering taking place two weeks later.
The companies that submitted their filings recently could start their roadshow in early September, just after the Labor Day holiday, and potentially go public midway through the month.
Buyer pointed out that historically, late August sees filings from companies aiming to be the first to enter the market during the back-to-school season. The timing aligns well as market participants return from summer breaks with renewed interest in exploring new investment prospects in the fourth quarter.
Although Instacart and Klaviyo hold implications for startup investors gauging the outlook for the rest of 2023 and beyond, Arm addresses a different audience.
Arm, a major player in chip design, is owned by SoftBank, which is seeking liquidity after significant losses from ill-timed and aggressive investments in entities like WeWork, Chinese ride-hailing firm Didi, and Indian hotel company Oyo.
Diverging from the norm, Arm is notably larger than a typical venture-backed company at the time of its IPO. Additionally, Arm, based in the U.K., has previously been a public company.
In its fiscal year 2023 ending in March, Arm, whose technology is integral to most global smartphones, reported $524 million in net income from $2.68 billion in revenue. This was a slight decrease from its 2022 revenue of $2.7 billion.
Achieving a public market valuation of $32 billion, Arm would necessitate an earnings multiple of approximately 61 times. In the semiconductor realm, Nvidia stands out with a price-to-earnings ratio of 114, but this is attributed to its tripling value and projected 170% sales growth in the current quarter. Qualcomm trades at 15 times earnings, while Applied Materials holds a ratio of 19 in the chip sector.
Despite the technology sector potentially slowing down, with the Nasdaq experiencing a 30% gain this year after a challenging 2022, companies need to move beyond focusing solely on market conditions. They must recognize when it’s time to go public and prove their value in the marketplace, as the last significant VC-backed tech IPO in the U.S. occurred in December 2021 with HashiCorp and Samsara.
Ultimately, a company’s value will be determined by the market, and sustained performance will create opportunities for selling shares at higher prices. As Buyer stated, the market, not the circumstances, will define a company’s worth.