- Arm is seeking a valuation of $52 billion as it plans to go public this month, while Instacart is also planning a multibillion-dollar debut.
- However, IPO and startup experts do not expect the splashy launches to revive the subdued market.
- A Wharton scholar compared the current situation to the years after the dot-com bubble burst.
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A lot of attention is being paid to the upcoming IPOs of Arm and Instacart, but it’s wishful thinking to expect the debuts to revitalize a market still suffering from the hangover of the pandemic boom.
The two have widely recognized brands and will command relatively high valuations overall compared to a typical company looking to go public.
SoftBank-owned Arm, for example, is looking to raise up to $4.87 billion and could fetch a valuation of up to $52 billion, according to its regulatory filing Tuesday.
The company that develops the chips used in most of the world’s cellphones is poised for its biggest initial public offering of the year and has amassed a wave of big-name interest from Samsung, Google, Apple and Nvidia, among other investors.
Bloomberg reported that online grocery delivery startup Instacart will announce its price range as early as Monday and that its shares could change hands starting in mid-September.
In 2021, Instacart was worth $39 billion as pandemic lockdowns boosted demand for delivery services. Bloomberg Intelligence estimates the valuation is now closer to $12 billion, but even that is more than double the higher typical IPO valuations.
Startup and financial experts don’t believe either name provides an accurate snapshot of the overall market, which is largely still in the doldrums.
“I don’t think the floodgates are suddenly opening after Arm and Instacart,” said Brianne Lynch, head of market research at EquityZen, a platform that offers investors shares of pre-IPO companies. “We are truly facing the worst IPO market since 2009.”
Dotcom vibes
In 1999 and 2000, a record number of companies went public despite not making a profit. Most of them — especially those with names ending in “.com” — failed to make it, as sky-high growth promises gave way to grim reality.
David Erickson, a senior fellow in Wharton’s finance department, told Insider that the current situation reminds him of the IPO landscape that followed the dot-com bust.
Most companies that went public during the pandemic are now trading below their IPO prices, and that was the case two decades ago for the companies that stayed afloat.
“What we had in 2020 and 2021 was very symbolic of what we saw back then,” Erickson said. “There was so much excitement around growth companies and the market got carried away. After 2000, it took years for IPOs to happen again, and now we’re kind of in that time.”
In other words, Arm and Instacart aren’t “most companies,” and their public debuts are outliers compared to other companies considering an IPO.
Hesitant investors and VCs
During the pandemic, many venture-backed companies were able to secure huge valuations despite having little to show for it – borrowing was cheap, markets were hot, and liquidity was plentiful.
The Fed’s historically aggressive rate hikes have put an end to all of that.
Today’s startups have to deal with a higher rate environment. According to Jackie Berardo, a tech startup advisor and researcher at Meta, that means investors won’t be as willing to jump on a meteoric growth offering from founders who haven’t made consistent profits.
“Coming to market now inevitably means a cut in valuation,” Berardo told Insider. “But it’s not just IPOs that have been closed for some time, acquisitions for startups have also slowed down. There are so limited exit options right now and it makes no sense for investors to park their capital in high-risk assets like an IPO.”
Aside from Arm and Instacart, investors must now understand that many companies will not be able to reach previously secured valuations in the next few years.
The lack of venture fundraising, EquityZen’s Lynch added, means startups have to decide whether to raise capital at a discount in the private market or take the risky shot of going public.
“In addition, there is a lot of pressure for late-stage companies to pull away from their VC backers,” Lynch said. “These VCs rely on these companies to exit so they can return capital to their limited partners so they can in turn invest in new companies. If there are no exits, the whole cycle will be broken.”
No recovery in sight
Aside from Cava, there have been few success stories across the IPO market over the past year, and that’s unlikely to change regardless of Arm and Instacart’s performance.
For Erickson, there are two dynamics at play that will determine whether the market can reopen.
First, investors and VC firms need to become more enthusiastic about supporting IPOs that may not deliver the same returns or even have similar growth prospects as in previous years.
And second, founders need to make peace with selling their company at lower valuations. That means dealing with higher interest rates and a more difficult business environment.
“Are there some standout companies that could join? Probably,” Erickson said. “But nobody wants to be first. Especially those similar to those that went public in 2020 and 2021, which are growing quickly and won’t break even for years. I don’t think Arm or Instacart will be the catalyst here.”
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