Venture capitalists are advising startups to delay plans to list in the U.S. until interest rates stabilize, after the debuts of Arm and Instacart dampened hopes for a rush to bring new technologies to market.
Online grocery delivery company Instacart, which launched its IPO on Sept. 19 and is seen as a key barometer for other private technology companies, closed the month below $30 despite a 40% surge in stock prices at the start of trading.
Arm, the SoftBank-backed chip designer, fluctuated around its $51 listing price in the two weeks following its IPO, but ended the month up nearly 5%. Marketing automation software company Klaviyo was the best performer of the three, with its IPO price up 15%.
All three companies got off to a strong start in the public markets, but the Fed said on September 20, the day Klaviyo debuted, that it would support another rate hike this year and a smaller-than-expected cut in 2024. Making for a bleak start for these companies.
Volatile trading conditions throughout September have frustrated Silicon Valley investors who had hoped that this month’s listings would open the door for dozens of private technology companies to go public. After the market took a turn for the worse in 2021, many new startups postponed their IPO plans.
“In our portfolio, our advice is: don’t do it unless you really need to,” said Mike Volpi, general partner at venture capital firm Index Ventures. “The market has been tough the last few weeks… Unless you need to get out, Otherwise I will wait until the second half of next year.”
Jason Greenberg, co-head of global technology, media and telecoms, said that as public listings remain risky, the startups most likely to pursue IPOs next are “those that go beyond the traditional goals of raising growth capital or providing liquidity.” factors forcing new companies.” Investment banking business of Jefferies.
Private market data firm PitchBook estimates that there has been a backlog of nearly 80 IPO candidates over the past year, during which time the public market has had a negative attitude towards technology startups. But some investors are trying to take a longer view.
“Everyone thinks IPOs are dead, but they’re not,” said Paul Kwan, managing director at venture capital firm General Catalyst and former head of Morgan Stanley’s West Coast technology banking business. He added that September’s three listings were “not a major turning point”.
Rising interest rates are particularly painful for private startups that cannot turn a profit because their valuations are based on future cash flows. Guan said IPOs are unlikely to recover until interest rates stabilize. He expects M&A activity among private companies to increase over the next six months.
Some companies may be forced to go public sooner because they need new capital to survive or grow — “not a good IPO story,” Greenberg warned — or to pay tax bills related to employee stock unit vesting. .
In recent years, a number of private Silicon Valley companies — including Instacart, Klaviyo and payments group Stripe — have given employees “restricted stock units” that allow them to cash out if the company is acquired or goes public.
In March, Stripe raised more than $6.5 billion in private stock sales, in part to cover employee tax obligations related to the vesting of these RSUs. Instacart will use “virtually all” of the roughly $600 million in proceeds from its IPO to address costs related to RSU vesting, according to a person familiar with the matter and the company’s S1 person.
Klaviyo is using nearly $60 million of its IPO proceeds to settle outstanding RSUs.
Don Butler, managing director of venture fund Thomvest, said the third factor driving new startups to go public is investors’ demand for liquidity.
Venture capital firms have longer investment horizons than private equity or public investors, with funds typically operating for 10 years. The investment returns for such funds are demonstrated when the next fund is raised from backers, which often include pension funds, endowments and other institutional investors.
But venture capital firms need startups to conduct an initial public offering or find other exit options, such as a sale, in order to distribute returns to investors. Butler said some will admit their companies aren’t as valuable as previously thought if it means getting a deal done.
Peter Hébert, co-founder of venture capital firm Lux Capital, said Instacart, Klaviyo and Arm prove that “the IPO window is open, even if it is a crack by historical standards.”
“While public investors are more discerning than in recent years, established companies with attractive growth prospects can raise public capital if they wish,” Herbert said.
Klaviyo sends a more promising signal to other potential IPO candidates that serve business customers rather than consumers. The marketing technology company has continued to grow rapidly during the pandemic while other companies have cut back on spending, and is now trading close to its peak private valuation of $9.5 billion set in 2021.
So-called “software-as-a-service” businesses like Klaviyo tend to provide public market investors with more predictable revenue than consumer-facing companies like Instacart, because customers pay a monthly subscription fee.
However, Greenberg said the outlook for even the strongest IPO candidates is less clear until interest rates are clearly stable and the economic outlook is more stable.
“Are the windows open? 100 percent,” he said. “Do I think IPO is going to take off? No, not in another six months.”
Svlook
