Instacart will begin marketing an initial public offering this week that is expected to value the online grocery delivery service at just a quarter of the $39 billion price the company fetched two years ago – a litmus test for new tech offerings.
The San Francisco-based e-commerce company is being closely watched by other private technology groups and their investors who believe it could spark a wave of initial public offerings at far lower stock valuations than those offered by venture capitalists in an industry-wide boom during the coronavirus pandemic were paid.
The Instacart offering, whose investor roadshow will begin this week, is one of the first tests of investor sentiment for venture capital-backed technology startups in public markets in about two years. This comes as British chip designer Arm has opened a window for initial public offerings, set to go public this week with an expected valuation of up to $52 billion, making it the biggest IPO of the year.
“A strong reception for Arm is a necessary but not sufficient condition for VC-backed companies to enter the market,” said Eric Liaw, general partner at venture firm IVP.
Many VCs see Instacart as a better barometer of Wall Street’s appetite for tech listings than Arm, a mature and profitable company being taken back public by a single owner, Japanese conglomerate SoftBank.
“[Instacart] would be a good indicator of what public market investors are looking for,” said Kyle Stanford, senior analyst at private market data firm PitchBook. “If it performs poorly, it will close the door to VC-backed companies. If things go well, a few more might submit.”
Three people with knowledge of Instacart’s IPO said initial discussions leading up to the marketing roadshow put the company’s value at a broad range of $8 billion to $14 billion, reflecting uncertainty about public valuations given the shortage new quotations. One person said less than 10 percent of Instacart shares would be offered. Instacart declined to comment.
Instacart’s CEO is former Facebook executive Fidji Simo © Bloomberg
An IPO at that price range would be a blow to venture capital firms, which have bought $265 million worth of the company’s shares based on a 2021 valuation of $39 billion.
Instacart and its brokers are expected to announce a price range for the shares to potential investors on Monday. Stock trading is expected to begin the following week.
The group, led by former Facebook executive Fidji Simo, cut its value to $12 billion earlier this year as part of an internal accounting exercise. That would have caused some venture investors to write down some of the value of their holdings. However, these investors will be forced to recognize any losses on their investments in Instacart if the company goes public.
Sequoia Capital and Khosla Ventures, two of Silicon Valley’s top venture firms, have participated in the most funding rounds since Instacart’s first significant funding round in 2013 and still stand to benefit from the IPO despite the valuation decline.
In later years, more funds were invested as the company’s valuation increased. D1 Capital, for example, began investing in 2018, while mutual funds like Fidelity and T Rowe Price first launched in 2020, according to PitchBook. According to PitchBook, more than a dozen smaller funds invested at Instacart’s peak value for the first time in 2021. In total, Instacart has raised more than $2.7 billion from investors.
Sequoia owns about 15 percent of Instacart, or 51 million shares, making it one of the startup’s largest venture capitalists, according to a person familiar with the matter. The company has invested about $300 million in Instacart in its funding rounds, including in 2021, the person said. If Instacart listed at a $10 billion valuation, Sequoia’s existing stake would be worth about $1.5 billion. Sequoia declined to comment.
In an unconventional move, Sequoia and a number of Instacart’s other private backers will buy additional shares in the IPO. That group, which also includes Norges Bank, TCV, Valiant Capital and D1 Capital, will acquire about $400 million in Instacart shares as corner investors, according to company filings.
VCs typically pay out early investments when their portfolio companies list on the stock market. The move suggests optimism that Instacart can gain momentum in the public markets.
A person close to Instacart’s IPO said the dramatic drop in its valuation since 2021 came even as the group reported its first profits this year. According to recent reports, profits improved from a net loss of $74 million in the first half of 2022 to a net profit of $242 million in the first half of this year.
Late-stage technology startups hoping to go public while reporting a loss are likely to face even tougher IPO valuations, the person said.
“Instacart has properties that have been hated over the last two years: grocery, delivery, logistics or operations – all of these companies used to be darlings and were very much avoided,” said the head of a large sovereign wealth fund that has invested in many of them. Stage for tech start-ups in the USA. “It is the first of these companies ever. It will be very important.”
Instacart is among a number of startups that sought rapid growth through venture capital during the boom years through late 2021, achieving multibillion-dollar valuations in the process.
Since then, startups have been forced to slash costs, curb their growth trajectory and endure far lower valuations as the economic downturn has battered public tech stocks and caused venture capital sources to dry up. Last week it was announced that Getir, a Turkey-based food delivery startup, cut its valuation to $2.5 billion from $11.8 billion early last year as it raised $500 million -dollars in new capital.
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In this more difficult environment, many start-ups refuse to raise fresh equity in order to avoid the associated reduction in valuation. If Instacart can successfully list at a valuation lower than its private peak, it will set an important precedent for other IPO candidates.
Instacart and the $9.5 billion marketing automation company Klaviyo, which filed for an initial public offering last month, are the first of these private tech companies to test public appetite.
A handful of other companies, including software company Databricks and identity verification startup Socure, are among the startups that could go public after a successful Instacart IPO, according to investors in those companies.
Instacart’s IPO bankers, led by Goldman Sachs and JPMorgan, will begin marketing the company to investors this week. The company plans to list on the Nasdaq under the ticker symbol CART.