Let's Talk About the New Round of Tech IPOs and How They Need to Deliver

Last week, the acronym IPO was finally being spoken in discussions again. For those who are not familiar with the term, IPO stands for initial public offering. It is the first time a company's stock is offered to the public for purchase. This is usually done to raise money for the company to finance its growth.

As reported by Ari Levy for CNBC, the topic of conversation in Silicon Valley has been which company will initiate contact. This is following a well-known venture-backed digital business that went public in the United States 20 months ago.

Instacart, a newcomer in supermarket delivery, and Klaviyo, a business that automates marketing campaigns, filed paperwork on Friday to begin trading on the stock market.

Meanwhile this week, chip designer Arm, owned by Japan's SoftBank, announced its plans to list on the Nasdaq after being taken private in a $32 billion acquisition seven years ago.

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These three companies might have diverse profiles, yet their upcoming public offerings collectively test the interest of investors in new opportunities. Depending on their initial performance, these offerings might encourage other firms to pursue IPOs in the fourth quarter.

Lise Buyer, founder of IPO consultancy Class V Group, noted that these moves could motivate management teams to seize the moment for IPOs, considering that the valuations seen in 2020 and 2021 are unlikely to return soon.

Instacart, backed at high prices by venture firms including Sequoia and Andreessen Horowitz, has had a big valuation haircut ahead of its IPO. After raising private cash at a $39 billion valuation in early 2021, the company slashed that number to $24 billion in March of last year as tech stocks sank and growth slowed dramatically in a post-Covid world. The valuation reportedly fell by another 50% by late 2022.

DoorDash, which is probably Instacart’s closest public market comparison, currently trades at 3.8 times revenue. That kind of multiple would value Instacart at around $11 billion.

Instacart, which reported revenue growth of 15% in the latest quarter to $716 million, has managed to turn a profit for five straight periods by keeping costs in check and slashing head count. Net income increased to $114 million from $8 million a year earlier.

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

Even though it has a much lesser-known brand, Klaviyo is growing significantly faster than Instacart, with revenue in the second quarter climbing 50% to $164.6 million. The business swung to a profit of $10.9 million in the period after losing close to $12 million a year earlier.

When looking for comparisons, the Bessemer Cloud Index, which consists of about 70 publicly traded cloud companies, provides the cleanest data. Klaviyo’s growth rate would put it near the top of the index, where companies trade at around 12 times revenue. That would imply a valuation for Klaviyo in the neighborhood of $7 billion.

Klaviyo’s biggest institutional backer is Summit Partners, followed by e-commerce software vendor Shopify, which is a key business partner. Venture firm Accel is also an investor.

Companies are filing to go public, with a waiting period of at least 15 days after the IPO filing before they start the roadshow, leading to potential offerings about two weeks later. Filing in late August aligns with the back-to-school season, and as the market gains fresh interest in new names for Q4, startups like Instacart and Klaviyo could impact investors' outlook for 2023 and beyond.

On the other hand, Arm has a slightly different audience. Owned by Masayoshi Son’s SoftBank, Arm seeks liquidity after past investments resulted in losses, presenting a unique case due to its size, U.K. location, and prior public status.

Arm, whose technology is critical to almost all of the world’s smartphones, reported $524 million in net income on $2.68 billion in revenue in its fiscal 2023, which ended in March, according to its filing. Arm’s 2023 revenue was slightly down from the company’s 2022 sales of $2.7 billion.

To capture a public market valuation of $32 billion, Arm would need a multiple of roughly 61 times earnings. Within the semiconductor market, Nvidia towers over everyone, with a price-to-earnings ratio of 114. But that’s a company that’s tripled in value this year and just told investors to expect 170% sales growth in the current quarter. Elsewhere in the chip space, Qualcomm trades for 15 times earnings and Applied Materials has a ratio of 19.

The technology sector may be starting to slow again. The Nasdaq is up 30% this year, coming off its worst year since 2008, but an outsized portion of the gains come from huge rallies in shares of Nvidia and Meta. So far in August, the Nasdaq is down 5.3% and is headed for its first monthly drop since February.

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Companies eventually need to shift their attention from market conditions and make the decision to go public, according to Buyer.

Since the last notable VC-backed tech IPOs in December 2021, demonstrating value in the market becomes crucial. The company's value will be determined by the market, and consistent performance can lead to selling shares at higher prices, she added.