Initial public offerings are back, warts and all.
After a two-year lack of new listings, shares of grocery delivery company Instacart opened for trading Tuesday at $42, up 40 percent from their initial public offering price of $30. The performance indicated that investors are eager to take risks on young tech companies – but only at the right price.
Instacart’s market capitalization, including all outstanding shares, totaled $13.9 billion. But even with the surge in stock price, the company’s valuation remains a far cry from the $39 billion that investors assigned it in the private market in 2021. It was a painful loss for investors who had bought at that peak, providing a harsh reality check. For other start-ups that raised funds at inflated valuations.
Instacart Chief Executive Fidji Simo 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.
“There will always be ups and downs in the markets,” she said, adding that she was more focused on what she could control.
The tech and finance industries had eagerly awaited new IPOs, hoping that they would bring more listings. The broader recession, marked by inflation and rising interest rates as well as layoffs and other cutbacks, has deepened investor skepticism toward tech companies, leading to a virtual halt in IPOs for the past two years.
Only 144 companies went public in the United States at that time, raising $22.5 billion, compared with 397 IPOs in 2021 that raised $142 billion, according to Renaissance Capital, which tracks new listings.
Things started to change last week when SoftBank-owned chip designer Arm went public. Its stock price was at the top of the proposed range and jumped 25 percent on its first day of trading. Many hoped that Arm’s IPO would encourage more investors to put money into the technology again.
A group of companies are eager to tap the public market. The market for private stocks More than 1,400 private start-ups, worth more than $4.9 trillion combined, could be candidates, according to EquityZen. These include social media company Reddit, ticketing start-up SeatGeek and car rental company Turo.
Marketing software start-up Klaviyo is also set to go public this week. Investors valued the company at $9.5 billion when it was privately held.
Investors have often been skeptical that the last generation of highly valued tech companies – called “unicorns” for their rare billion-dollar valuations – could turn a profit.
Both Instacart and Klaviyo have rejected that expectation. Instacart made a profit of $428 million on revenue of $2.5 billion last year, partly because it expanded into advertising and software services beyond its core grocery delivery business. Clavio lost money last year but made a profit of $15 million on revenue of $320 million in the first half of this year.
Overall, they show that the level of what investors expect from a company going public is higher than ever. “Profitability will be important,” said Kyle Stanford, a PitchBook analyst who tracks startups.
Ms. Simo said that public market investors had raised questions about Instacart’s future growth, but they placed a huge premium on its profits.
“The change we have achieved in the last two years is significant,” he said.
Instacart’s path has not been easy. Founded in 2012 as a service that connects customers at home with contracted workers who shop and deliver their groceries, it has been scrutinized alongside other gig companies like Uber and DoorDash. The issue faced is whether its contractors should be treated as employees and whether they are fairly compensated.
Customers flocked to Instacart’s app in the early days of pandemic-related lockdowns, but its growth slowed in mid-2021 as people returned to grocery stores, raising questions about the long-term sustainability of the business.
Instacart co-founder and Chief Executive Apoorva Mehta stepped down that summer and Ms. Simo, a former Meta executive, took over. Under Ms. Simo, Instacart has increasingly focused on the advertising and grocery software businesses, which have helped the company make money.
As the company’s shares began trading, Mr Mehta reflected on the company’s ups and downs. “In the company’s first few years, it wasn’t clear to the industry that Instacart was here to stay,” he said. “I don’t think it’s a question anymore.”
As part of its IPO, Instacart sold shares to investors before its formal “roadshow” pitch. PepsiCo, one of its advertising clients, was among those purchasing shares worth $175 million. That 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 owning a 19 percent stake and D1 Capital owning 14 percent. Mr Mehta holds an 11 per cent stake, now worth about $1.2 billion. “It’s a billion-dollar question,” he said of his plan for a windfall.
Meredith Kopit Levien, chief executive of The New York Times, sits on Instacart’s board.
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.
