Venture capitalists are advising startups to delay plans to go public in the U.S. until interest rates plateau, after the choppy debuts of Arm and Instacart dampened hopes of a rush of new tech listings.
Online grocery delivery service Instacart, whose Sept. 19 IPO was seen as a key barometer for other private tech companies, ended the month below its $30 list price despite rising as much as 40 percent in early trading.
Arm, the SoftBank-backed chip developer, fluctuated above and below its $51 list price in the two weeks after its IPO, but ended the month nearly 5 percent above it. Klaviyo, a marketing automation software company, is the best performer of the three, up 15 percent from its IPO price.
All three companies had good starts in the public markets, but those were marred by the Federal Reserve when it announced on September 20 – the day of Klaviyo’s debut – that it would expect another rate hike this year and fewer rate cuts in 2024 expected to support.
Turbulent trading conditions in September frustrated Silicon Valley investors who had hoped that this month’s listings would open the door for dozens more private technology companies to go public. Many startups had postponed their IPO plans after the market deteriorated in 2021.
“In our portfolio, we would advise: Hold off unless you really have to,” said Mike Volpi, general partner at venture capital firm Index Ventures. “The market has been difficult in the last few weeks. . . Unless you have to go out, I would wait until the second half of next year.”
As IPOs remain risky, the startups most likely to go public next were “those compelled to do so by factors beyond the traditional goals of raising growth capital or providing liquidity,” said Jason Greenberg, co-head of global technology, media and telecommunications investment banking at Jefferies.
Private market data firm PitchBook estimates a backlog of nearly 80 IPO candidates has built up over the past year, a time when public markets have turned sour on technology startups. However, some investors have tried to take a longer-term view.
“Everyone thought IPOs were dead — but they’re not,” said Paul Kwan, managing director of venture firm General Catalyst and former head of West Coast tech banking at Morgan Stanley. The three listings in September were “not a big turning point,” he added.
Interest rate increases are particularly painful for unprofitable private start-ups, which are valued based on their future cash flow. Until interest rates stabilize, Kwan said, the number of IPOs is unlikely to pick up again. He expected an increase in mergers and acquisitions of private companies in the next six months.
Some companies may be forced to go public sooner rather than later because they need fresh capital to survive or grow – “not a good IPO story,” Greenberg warned – or because they have tax liabilities related to the vesting of Had to pay employee shares.
In recent years, many private Silicon Valley companies — including Instacart, Klaviyo and payments giant Stripe — have offered employees “restricted stock units,” allowing them to earn money when a company is acquired or goes public .
In March, Stripe raised more than $6.5 billion through a private stock sale, in part to cover employee tax liabilities related to the vesting of these RSUs. According to a person familiar with the matter and the company’s S1, Instacart would use “virtually all” of the proceeds from its roughly $600 million initial public offering to pay costs associated with the transfer of the RSUs.
Klaviyo is using nearly $60 million of the proceeds from its IPO to settle outstanding RSUs.
A third factor driving startups onto the public market is the liquidity needs of their investors, according to Don Butler, managing director of venture fund Thomvest.
Venture firms invest for longer terms than private equity or public investors, with funds typically having a 10-year life cycle. Such funds’ return on investment is evidence of this when they raise their next fund from backers, which typically include pension funds, endowments and other institutional investors.
But venture capital firms need startups to go public or find another exit, such as a sale, to distribute returns to their investors. Some will accept that their companies aren’t as valuable as once thought if it meant a deal could get done, Butler said.
Instacart, Klaviyo and Arm were proof that “the IPO window is open – even if it’s only a crack by historical standards,” said Peter Hébert, co-founder of venture capital firm Lux Capital.
“Although public investors are far more sophisticated than in recent years, mature companies with attractive growth prospects can raise public money if they wish,” Hébert said.
Klaviyo is a more hopeful signal for other potential IPO candidates that serve business customers rather than consumers. The marketing technology company continued to grow quickly despite the pandemic while others cut back, trading near its 2021 peak private valuation of $9.5 billion.
So-called “software as a service” companies like Klaviyo tend to offer public market investors more predictable revenue because customers pay a monthly subscription than consumer-focused companies like Instacart.
But Greenberg says the outlook for even the strongest IPO candidates may not be clear until interest rates have finally plateaued and the economic outlook is more stable.
“Is the window open? 100 percent,” he said. “Do I think offers will increase? No. Not for another six months.”
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