Tech and Science

Technology IPOs are coming back — now they have to perform

InstaCart staff fulfill orders for delivery

Patrick T Fallon | Bloomberg | Getty Images

Last week, tech investors finally heard their favorite three-letter acronym: IPO.

It's been 20 months since a big-name, venture-backed tech company went public in the US, and Silicon Valley is all about who's going to break the ice. On Friday, grocery delivery startup Instacart and data and marketing automation company Klaviyo signed up for IPOs.

Earlier this week, chip designers Arm, which is owned by Japan SoftBanksaid it plans to go public with Nasdaq in a $32 billion buyout seven years after going private.

The three companies have very little in common, but overall they represent a test of public market investors' enthusiasm for new opportunities. Depending on how they behave early, their offerings could persuade others to follow in the fourth quarter.

“Other teams will be watching as these proposals are received, and it may encourage some of those management teams to stop waiting on the past and just do it,” said Lise Buyer, founder of IPO advisory firm Class V Group.

By “yesterday,” Buyer refers to the type of valuations tech companies achieved in 2020 and 2021, which were record years for tech IPOs. software provider snowflake, which launched in late 2020 and whose price-to-sales ratio rose to around 50, now trades at less than 17 times sales. food delivery company DoorDash The company has seen shares fall by more than two-thirds since its 2021 peak, though sales have since risen by over 60%.

“We're not going back to 2021 anytime soon,” Buyer said.

Instacart, backed by venture firms like Sequoia and Andreessen Horowitz at high prices, suffered a significant valuation discount ahead of its IPO. After raising $39 billion worth of private cash in early 2021, the company reduced that number to $24 billion last March as tech stocks plummeted and growth slowed dramatically in a post-Covid world. The valuation reportedly dropped another 50% by the end of 2022.

DoorDash, probably Instacart's closest public market comparison, currently trades at 3.8 times sales. Such a multiple would value Instacart at around $11 billion.

Instacart reported sales growth up 15% last quarter to $716 million, has managed to turn a profit for five consecutive periods by controlling costs and reducing headcount. Net income increased to $114 million from $8 million last year.

Klaviyo, which was valued at $9.5 billion in a funding round in 2021, was not forced to lower its valuation, according to Pitchbook public reports. Founded in 2012, the company's technology helps customers store user data and create profiles that enable targeted marketing via email, text messages and other channels.

Andrew Bialecki, CEO and co-founder of Klaviyo, poses for a portrait in Boston on September 5, 2019.

Barry Chin | Boston Globe | Getty Images

Despite having a much lesser-known brand, Klaviyo is growing significantly faster than Instacart revenue in the second quarter, it rose 50% to $164.6 million. The company made $10.9 million in profit during that period, after losing nearly $12 million a year earlier.

When looking for comparisons, the Bessemer Cloud Index, which consists of around 70 publicly traded cloud companies, delivers the cleanest data. Klaviyo's growth rate would put it at the top of the index, where companies trade at around 12 times sales. That would put Klaviyo in the region of $7 billion in valuation.

Klaviyo's top institutional backer is Summit Partners, followed by the e-commerce software provider Shopify, an important business partner. The venture company Accel is also an investor.

According to Buyer, it's not surprising that companies are now filing for an IPO. Due to the way SEC rules work, management teams and bankers must wait at least 15 days after filing the IPO before beginning their roadshow. The offer could come two weeks later.

Companies that filed last week can take to the streets in early September, right after Labor Day, and go public mid-month.

“Historically, late August has seen submissions from companies looking to be first in the back-to-school season,” Buyer said. “The timing makes perfect sense. People are returning from the summer holidays with a fresh view of the market and an interest in adding new names in Q4.”

While Instacart and Klaviyo could have a significant impact on startup investors as they consider what to expect for the remainder of 2023 and into next year, Arm has a slightly different audience.

The chip developer is owned by Masayoshi Son's SoftBank, which is looking for liquidity after losing billions of dollars to inappropriate and overly aggressive investments in names like WeWork, a Chinese ride-hailing company, in recent years I have and the Indian hotel company Oyo.

Arm is not only much larger than a typical venture capital firm at the time of the IPO, but is also based in the UK and has historically been a publicly traded company.

Arm, whose technology is critical to nearly all of the world's smartphones, reported net income of $524 million on sales of $2.68 billion for fiscal 2023, which ended in March, according to its filing. Arm's sales in 2023 were slightly below the company's 2022 sales of $2.7 billion.

To reach a public market valuation of $32 billion, Arm would need a multiple of about 61 times earnings. Within the semiconductor market Nvidia With a price-to-earnings ratio of 114, it tops all the rest. But this is a company that has tripled in value this year and has just told investors it should expect revenue to grow 170% in the current quarter. Elsewhere in the chip area, Qualcomm Trades for 15x profit and Applied Materials has a ratio of 19.

The technology sector could slow down again. The Nasdaq is up 30% this year, posting its worst year since 2008, but a large part of the gains can be attributed to huge rallies in Nvidia and Nvidia shares Meta. So far in August, the Nasdaq is down 5.3% and is facing its first monthly decline since February.

But at some point, companies will have to stop focusing on market conditions and simply decide it's time to go public, Buyer said, since there hasn't been a significant VC-backed tech IPO in the U.S. since then Hashi Corp And samsara went public in December 2021.

The market determines a company's value, and as it evolves over time there are always opportunities to sell shares at a higher price.

“You have to prove your worth in the market,” she said.

REGARD: Founders Fund's Keith Rabois talks about the IPO landscape

Founders Fund's Keith Rabois talks about the IPO landscape

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