Initial public offerings are back, warts and all.
After a two-year dearth of new listings, shares of grocery delivery company Instacart closed their first day of trading Tuesday at $33.70, up 12% from their IPO price of 30 bucks. The performance showed that investors were eager to take a chance on young tech companies – but only at the right price.
Instacart’s market capitalization, including all outstanding shares, was $11.1 billion. But even with the initial share price rise, the company’s valuation fell far short of the $39 billion that investors had assigned to it in the private market in 2021. It was a painful loss for investors who had bought at this peak, sending a harsh reality. check to other startups that have raised money at inflated valuations.
Fidji Simo, Instacart’s chief executive, said the valuation reflects changes in public stock prices, even though the company has improved its performance over the past two years, including turning a profit.
“Markets will always ebb and flow,” she said, adding that she was focusing more on what she could control.
The technology and financial sectors were eagerly awaiting new IPOs in the hope that they would lead to more listings. Inflation and rising interest rates, along with a broader slowdown marked by layoffs and other cutbacks, have increased investor skepticism of technology companies, leading to a near freeze in IPOs on the stock market over the past two years.
Only 144 companies went public in the United States during that period, raising $22.5 billion, compared to 397 IPOs that raised $142 billion in 2021, according to Renaissance Capital, which tracks new listings.
Things started to change last week when Arm, a chip designer owned by SoftBank, went public. Its share price was at the top of the proposed range and jumped 25 percent on the first day of trading. Many hoped that Arm’s IPO would encourage more investors to invest in technology again.
A number of companies are eager to tap into the public market. More than 1,400 private startups, with a total value of more than $4.9 trillion, could be candidates, according to EquityZen, a private equity marketplace. Among them are social media company Reddit, ticketing startup SeatGeek and car rental company Turo.
Klaviyo, a marketing software startup, is also expected to go public this week. Investors valued the company at $9.5 billion when it was privately held.
Investors have often been skeptical about the ability of the latest generation of highly regarded technology companies – called “unicorns” because of their rare billion-dollar valuations – to turn a profit.
Both Instacart and Klaviyo have defied this expectation. Instacart made a profit of $428 million on revenue of $2.5 billion last year, in part because it expanded beyond its core grocery delivery business and expanded into advertising and software services. Klaviyo lost money last year, but made a profit of $15 million on revenue of $320 million in the first half of this year.
Taken together, they showed that the bar for what investors expect from a company’s IPO is higher than it used to be. “Profitability will be key,” said Kyle Stanford, an analyst at PitchBook, which tracks start-ups.
Ms. Simo said public market investors had raised questions about Instacart’s future growth but placed a very large premium on its earnings.
“The turnaround we have achieved over the last two years has been extremely significant,” she said.
The path to Instacart hasn’t been easy. Founded in 2012 as a service connecting home-based customers with contract workers who shopped and delivered their groceries, it has faced intense scrutiny – alongside other gig companies like Uber and DoorDash – to find out whether its contractors should be treated as employees and whether they were treated fairly. compensated.
Customers flocked to Instacart’s app at the start of the pandemic lockdowns, but its growth plunged in mid-2021 as people returned to grocery stores, raising questions about the company’s long-term sustainability.
Apoorva Mehta, Instacart’s co-founder and chief executive, resigned that summer and Ms. Simo, a former Meta executive, took over. Under Ms. Simo, Instacart increasingly focused on the grocery advertising and software businesses, which helped the company make money.
As the company’s shares began trading, Mr. Mehta reflected on the company’s ups and downs. “In the early years of the company, it wasn’t clear to the industry that Instacart was here to stay,” he said. “I don’t think that’s a question anymore.”
As part of its IPO, Instacart sold shares to investors ahead of its formal “road show” presentations. PepsiCo, one of its advertising clients, was among them and bought shares for $175 million. The move “sent a strong signal” to the market, Ms. Simo said.
Investment firms Sequoia Capital and D1 Capital are among Instacart’s largest outside shareholders, with Sequoia holding a 19 percent stake and D1 Capital 14 percent. Mr Mehta owns an 11 per cent stake, now worth around $976 million. As for his plans for the windfall, he said: “That’s the billion-dollar question. »
Meredith Kopit Levien, chief executive of The New York Times, serves on the board of Instacart.
Instacart celebrated its listing by ringing the Nasdaq opening bell at its San Francisco office with more than 1,000 employees and “a lot of food,” Ms. Simo said.
