The Tech IPO Market Opens Up After a Freeze
After a 21-month freeze on tech IPOs, the market has finally started to see some activity. However, the results so far have not been encouraging for late-stage startups. Last week, chip designer Arm made its debut, followed by grocery delivery company Instacart and cloud software vendor Klaviyo. Despite being in different sectors, all three companies have experienced a similar reaction from Wall Street.
Investors Profit, Others Struggle
Investors who bought shares at the IPO price have made money if they sold immediately. However, for everyone else, the results have been disappointing. This may not be a problem for companies whose main goal is to go public and provide liquidity for employees and early investors. But for most companies in the pipeline, especially those that can afford to stay private, this lackluster performance is not appealing.
Concerns Over Valuations
Eric Juergens, a partner at law firm Debevoise & Plimpton, explains that concerns over valuations are causing hesitation. The market’s response to these IPOs will determine how companies and investors value comparable companies looking to go public in the future. However, Juergens believes that the market will open up further in the first half of next year due to pressure from investors, employees, and financing requirements.
Mixed Performance of Recent IPOs
Arm, controlled by SoftBank, saw its shares rise 25% on the first day of trading, but have been falling since then. Instacart experienced a 40% jump initially, but the gains were quickly erased. Klaviyo had a 23% increase in its first trade, but closed only 9% higher than its IPO price. None of these companies were seeking a big jump in their stock prices, but the lack of enthusiasm on Wall Street is not the desired outcome either.
Importance of Liquidity for Employees
Instacart CEO Fidji Simo emphasizes that the company’s IPO was not about optimizing pricing, but rather providing liquidity for employees. The IPO was not intended to raise money, but to ensure that employees had the opportunity to sell their stocks. The company was not looking for a perfect market window and wanted to prioritize employee benefits.
Adjusting Valuations and Prioritizing Profitability
Klaviyo CEO Andrew Bialecki explains that the company was not under any pressure to go public and had a strong business momentum. Klaviyo’s revenue increased 51% in the latest quarter, and the company became profitable. Bialecki believes that companies should focus on profitability to be in control of their own destiny. However, during the peak IPO years, valuations were based on future sales rather than profitability.
Mixed Outlook for Tech IPOs
While the recent IPOs have not received much excitement, Aswarth Damodaran, a professor at NYU’s Stern School of Business, believes that they are performing reasonably well given the skepticism in the market. If the stock prices remain above the offer price in the coming weeks, it would be seen as a win for these companies.
