Instacart’s cut-price IPO to test Wall St appetite for new tech listings

Instacart is set to launch an initial public offering this week that is expected to value the online grocery delivery company at just a quarter of its $39 billion valuation two years ago, a litmus test for new technology going public.

The San Francisco-based e-commerce company is being closely watched by other private technology groups and their investors, who believe it could spark a wave of IPOs with stock valuations well below what they were during the industry-wide boom during the coronavirus pandemic. The valuation paid by venture capitalists.

Instacart’s launch will kick off an investor roadshow this week, one of the first tests of investor sentiment for venture-backed tech startups in the public markets in two years. At the same time, British chip design company Arm has opened its IPO window. The company will go public this week and is expected to be valued at as much as $52 billion, making it the largest listing this year.

“A strong response to Arm is a necessary but not sufficient condition for venture-backed companies to enter the market,” said Eric Liaw, general partner at venture capital firm IVP.

Many venture capital firms believe Instacart better reflects Wall Street’s interest in tech IPOs than Arm. Arm is a mature and profitable business that is being brought back to the public markets by single owner Japan’s SoftBank Group.

“(Instacart) will be a good indicator of what public market investors are looking for,” said Kyle Stanley, principal analyst at private markets data firm PitchBook. “If it underperforms, venture capital-backed companies will be turned away. If it works well, more people may apply.”

Three people familiar with the Instacart IPO said early discussions ahead of a marketing roadshow put its valuation at between $8 billion and $14 billion, reflecting uncertainty about public valuations in the absence of new public companies. Less than 10% of Instacart stock will be sold, one person said. Instacart declined to comment.

Fidji Simo, CEO of Instacart and former Facebook executive

Instacart’s CEO is former Facebook executive Fidji Simo © Bloomberg

An IPO in this price range would be a blow to venture capital firms that bought $265 million worth of the company’s stock based on a 2021 valuation of $39 billion.

Instacart and its brokers are expected to issue a series of shares to potential investors on Monday. Shares are expected to begin trading next week.

The group, led by former Facebook executive Fidji Simo, slashed its valuation to $12 billion earlier this year as part of an internal accounting exercise. This will prompt some venture investors to write down some of the value of their holdings. However, when Instacart goes public, these investors will be forced to acknowledge any losses on their investments.

Sequoia Capital and Khosla Ventures, two of Silicon Valley’s top venture capital firms, have participated in most of Instacart’s financing since its first major round in 2013 and are still expected to benefit from the IPO despite a decline in valuation.

As the company’s valuation grew, more money was invested in later years. For example, D1 Capital began investing in 2018, while mutual funds such as Fidelity and T Rowe Price first stepped in in 2020, according to PitchBook data. A dozen smaller funds made first-time investments in Instacart at its peak valuation in 2021, according to PitchBook. In total, Instacart has raised more than $2.7 billion from investors.

Sequoia Capital owns about 15% of Instacart, or 51 million shares, according to a person familiar with the matter, making it one of the startup’s largest venture investors. The company has invested about $300 million in Instacart across several funding rounds, including in 2021, the person said. If Instacart went public at a $10 billion valuation, Sequoia Capital’s existing stake would be worth about $1.5 billion. Sequoia declined to comment.

Sequoia Capital and some of Instacart’s other private backers will take the unusual step of buying more shares in the IPO. The group, which also includes Norges Bank, TCV, Valiant Capital and D1 Capital, will buy about $400 million of Instacart stock as cornerstone investors, according to company documents.

Venture capital firms typically cash out early-stage investments when their portfolio companies go public. The move signals optimism about Instacart’s rebound in the public markets.

A person familiar with the Instacart IPO said that although the group reported profits for the first time this year, the company’s valuation has fallen significantly since 2021. The company’s earnings increased from a net loss of $74 million in the first half of 2022 to a net profit of $242 million in the first half of this year, according to recent filings.

Later-stage technology startups looking to go public while reporting losses may face tighter IPO valuations, this person said.

The head of a large sovereign wealth fund said: “The characteristics of Instacart have become undesirable over the past two years: groceries, delivery, logistics or operations — all of these companies were once darlings but have since become very shunned. ” Hosting tech startups in America. “This is the first of these companies to come out of the gate. It’s going to be very important.”

Instacart was among a wave of startups that burned through venture capital in pursuit of rapid growth during the boom that ended in late 2021, earning multibillion-dollar valuations in the process.

Since then, startups have been forced to slash costs, lower their growth trajectories and endure much lower valuations as the recession hammered public tech stocks and dried up venture capital. Last week, news broke that Turkey-based grocery delivery startup Getir had slashed its valuation to $2.5 billion from $11.8 billion early last year after raising $500 million in new capital.

In this tougher environment, many start-ups are refusing to raise new equity to avoid the associated valuation cuts. If Instacart can successfully go public at a valuation below its private peak, it would set an important precedent for other IPO candidates.

Instacart and Klaviyo, the $9.5 billion marketing automation company that filed for IPOs last month, are the first private tech companies to test the public’s appetite.

Instacart could go public after a successful IPO, according to investors in a handful of other companies, including software company Databricks and identity verification startup Socure.

Instacart IPO bankers, led by Goldman Sachs and JPMorgan Chase & Co., will begin pitching the company to investors this week. The company plans to list on Nasdaq under the stock code CART.

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