The Return of the IPO

The past year and a half has been icy for late stage private companies looking to go public, prompting everyone to speculate on when things might pick up again. According to EY, and as presented on the graphs below, the number of US IPO deal counts and proceeds have plummeted in 2022 and the first half of 2023, with deal count combined over this period down over 63% from 2022. IPO proceed numbers have seen an even more aggressive decline, down nearly 88% over the same period.

While Cava and Oddity IPO’s have been recent successes, its been 20 months since a notable venture backed tech company when public in the U.S., and many investors have been growing impatient. However, August brought some news that the thaw might be on, with Instacart, Klaviyo, and Arm all indicating that they will be IPO’ing in September. This is a big deal for VCs who have been feeling the liquidity crunch, as most notably exemplified by Tiger’s liquidity issues which TechCrunch recently wrote about. The IPO’s are sure to be a bellwether for other late stage tech companies on the sidelines, so lets do a breakdown of each one and give some more information on what investors might be able to expect.

Instacart has been on the list of tech start ups that might open the IPO market for some time, and after filing on the 25^th, its debut on the public market is poised to be the first significant venture-backed tech IPO since December 2021. However, Instacart is up against some challenges hitting the public market, the biggest of which being its valuation. Instacart’s latest internal valuation was $12 billion as of April, far and away less than the $39 billion valuation at which they raised their March 2021 round. As for their financials for the first six months of 2023, the company brought in $1.5 billion in revenue and $242 million in net income, an improvement from the $1.1 billion in sales and a $74 million loss in there same period last year. However, growth of the grocery business has slowed significantly, and investors might be worried that the company can’t meet the promises it made back in 2021 when it commanded the $39 billion valuation.

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Klaviyo, a data and marketing automation company, has also been on the shortlist to kick off the IPO market thawing, and arguably is in a better position than Instacart to be successful. Founded in 2012, Klaviyo helps companies store user data and build profiles on them to send targeted marketing via email, text messages and other channels. It got its start in the e-commerce industry by primarily serving online businesses, though Klaviyo said it’s seeing growing demand from companies in other verticals like restaurants, travel, and events and entertainment. While the company commanded a valuation of $9.5 billion when it last raised in 2021, like Instacart, they may have a tough time getting that. At prevailing valuations for other comparable public companies, such as HubSpot and Braze, Klaviyo is likely to be valued at around $5.3 billion, 40% lower than that last raised price. For financials, the company posted revenue of $164.6 million for the quarter ended June 30, a 51% increase from the same period last year. Additionally, gross margins climbed to above 75% for the first half of this year, higher than the 70% levels in both 2021 and 2022. Speculation aside, both of these IPOs will serve as great data points to help figure out where primary and secondary values for other late stage private companies should be. As Pitchbook put it, “An IPO is a price discovery mechanism."

And finally, onto the big one, the Arm IPO. The chip designer’s planned IPO is expected to be the biggest of the year, and Softbank is relying on a successful exit here to bolster its portfolio that has gotten beaten up during the bear market. Softbank acquired ARM Holdings in July 2016 for $32 billion. After the sale, it subsequently sold 25% of the business for $8 billion to the Vision Fund, which was set up to invest in new technologies. However, as of August of this year, Softbank has bought back the stake in Arm at a valuation of $64 billion. The deal signals the valuation Softbank could aim to achieve from the initial public offering. As of this morning, SoftBank said it was seeking an equity value of $50 billion to $54 billion as part of the roadshow for Arm’s initial public offering, factoring in shares issued to employees that are yet to vest. Like Instacart and Klaviyo, it remains to be seen if the market will buy into this price.

Why this matters: People are going to be analyzing and speculating on these three companies until the day they IPO. Ultimately however, the public market is going to be the decider on what happens. What we do know for certain though is this: however the public markets react to these IPOs, we will at least finally get some indication of a reasonable expectation of value for late stage companies as we move out of the boom time fund raising years of 2020 and 2021.

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