Venture capitalists have advised start-ups that they should delay plans to list in the US, until interest rates are stable. This is after Arm and Instacart’s choppy debuts dampened hopes of a rush for new tech listings.
The price of the online grocery delivery service Instacart that was listed on September 19, which was seen as an important barometer to other private tech firms, finished below $30 despite a surge up to 40% as trading started.
Arm fluctuated between $51 and $51 in the two weeks after its initial public offering but ended the month nearly 5 per cent higher. The best performing company is Klaviyo, which has risen 15 percent from its IPO.
The Federal Reserve announced on September 20, the day Klaviyo made its debut, that it would support a further interest rate increase this year. It also indicated that 2024 will see fewer reductions than anticipated.
The volatile trading conditions in September disappointed Silicon Valley investors, who had hoped that the month’s listings could lead to the listing of dozens more tech companies. After the market deteriorated in 2021, many start-ups delayed their IPO planning.
Mike Volpi is a general partnership at Index Ventures, and he said: “In our portfolio, we advise that you hold off unless it’s absolutely necessary.” The market has been rough over the last few weeks. . . “Unless you have to go out I would wait until the second part of next year.”
Jason Greenberg is co-head of Jefferies’ global technology, media, and telecoms investment bank. He said that public listings remain risky. The start-ups who are most likely to go public next will be “those forced by factors other than the traditional goals of providing growth capital or liquidity”.
PitchBook, a private markets data company, estimates that a backlog containing almost 80 IPOs has accumulated over the last year. This is a time when public markets have soured towards tech start-ups. Some investors, however, have taken a more long-term approach.
Paul Kwan, a former Morgan Stanley West Coast tech banking head and managing director of venture firm General Catalyst, said that “everyone thought IPOs had died — they’re not.” He added that September’s three listings “wasn’t some major turning point”.
The rise in interest rates is particularly painful for private start-ups that are not profitable and are valued based on their future cash flows. Kwan stated that IPOs would not be likely to reshape until rates stabilized. He predicted that private companies would increase their mergers and purchases over the next six-month period.
Greenberg warned that some companies may be forced to list earlier rather than later if they need fresh capital for survival or growth — “not a great IPO story” — or to cover tax bills related to employee stock unit vesting.
In the past few years, many Silicon Valley private companies, including Instacart and Klaviyo, as well as payments group Stripe, have offered their employees ” limited stock units”, which allow them to profit when a company gets acquired or becomes public.
Stripe raised over $6.5bn through a private stock offering in March. This was done in part to cover employee tax liabilities related to the vesting of RSUs. According to a source with knowledge of the issue and Instacart’s S1, the company will use “effectively” all of the approximately $600mn raised from its IPO in order to cover costs related to RSU vesting.
Klaviyo has used almost $60mn from the proceeds of its IPO in order to settle outstanding RSUs.
Don Butler, managing Director at Thomvest, says that the need of investors for liquidity is a third factor in driving startups to go public.
Venture firms typically invest for a longer period of time than private equity and public investors. Funds usually have a lifecycle of 10 years. Returns on investments from these funds are a key factor in raising funds from institutional investors, such as pension funds, endowments, and other institutions.
Venture capital firms must have their start-ups IPO or achieve another exit such as a sales to be able to return returns to investors. Butler said that some would be willing to accept that their company was not as valuable as they once believed if it meant that a deal could be made.
Instacart Klaviyo and Arm are examples of “the IPO Window is Open — even if it’s a crack according to historical standards”, says Peter Hebert. Hebert is the co-founder and partner at venture capital firm Lux Capital.
Hebert said that public investors were more selective than they had been in the past, but mature companies with promising growth prospects could still raise money from the public if so desired.
Klaviyo is a positive signal for other IPO candidates who are interested in serving business clients, not consumers. The marketing technology company grew rapidly during the pandemic, while others cut back. It is now trading near its peak private valuation set in 2021 of $9.5bn.
As customers pay a subscription monthly, businesses that offer “software as service” such as Klaviyo are more likely to provide predictable revenue for public market investors than consumer-facing firms like Instacart.
Greenberg says that even the best IPO candidates will not have clear prospects until the interest rate has definitively peaked and the economy outlook is more stable.
Is the window open?” “100%,” he replied. Do I think that listings will take off?” No. “Not for six more months.”