IPOs are back, warts and all.
After a two-year lack of new listings, shares of grocery delivery company Instacart closed their first day of trading at $33.70 on Tuesday, up 12 percent from their initial public offering price of $30. The performance signaled that investors were willing to take a risk on young technology companies – but only at the right price.
Instacart’s market capitalization, including all outstanding shares, totaled $11.1 billion. But even with the early rise in share price, the company’s valuation remained far from the $39 billion that investors had allocated to it in the private market in 2021. It was a painful loss for the investors who had bought in at the time, and brought with it a harsh reality to look at other startups that have raised money at inflated valuations.
Instacart Chief Executive Officer Fidji Simo said the valuation reflects changes in public stock prices, even as the company has improved its performance over the past two years, including by generating profits.
“Markets will always fluctuate,” she said, adding that she is more focused on what she can control.
The technology and financial industries had been eagerly awaiting new IPOs in the hope that they would lead to more IPOs. Inflation and rising interest rates, as well as a general downturn marked by layoffs and other cuts, increased investor skepticism about technology companies and led to a virtual freeze on initial public offerings over the past two years.
Only 144 companies went public in the U.S. during the period, raising $22.5 billion, compared with 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. The share price was at the upper end of the suggested range and rose 25 percent on the first day of trading. Many hoped that Arm’s IPO would encourage more investors to put money back into the technology.
Numerous companies are eager to enter the public market. More than 1,400 private startups with a combined value of more than $4.9 trillion could be candidates, according to EquityZen, a private equity marketplace. These include the social media company Reddit, the ticketing start-up SeatGeek and the car rental company Turo.
Klaviyo, a marketing software start-up, is also set to go public this week. When the company was privately held, investors valued the company at $9.5 billion.
Investors have often been skeptical that last generation’s highly valued technology companies – called “unicorns” because of their rare billion-dollar valuations – could turn a profit.
Both Instacart and Klaviyo have defied this expectation. Instacart posted a profit of $428 million on revenue of $2.5 billion last year, thanks in part to the company expanding beyond its core grocery delivery business into ads 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 investors’ expectations of a company going public is higher than before. “Profitability will be key,” said Kyle Stanford, an analyst at PitchBook, which tracks startups.
Ms. Simo said public market investors have asked questions about Instacart’s future growth but have placed a very high premium on earnings.
“The turnaround we achieved over the last two years was extremely important,” she said.
Instacart’s journey hasn’t been easy. The company was founded in 2012 as a service that connected customers in their homes with contract workers who bought and delivered their groceries, and has faced scrutiny — along with other gig companies like Uber and DoorDash — over whether its contractors should be treated as employees and whether they are fairly compensated.
Customers flocked to the Instacart app in the early days of the pandemic lockdown, but its growth stalled 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 over the summer and Ms. Simo, a former meta executive, took over. Under Ms. Simo, Instacart increasingly focused on advertising and grocery 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 company’s early 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 ahead of its official “roadshow” pitches. PepsiCo, one of its advertisers, was among them, buying $175 million worth of shares. This 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 holding a 14 percent stake. Mr. Mehta holds an 11 percent stake, currently worth about $976 million. As for his windfall plans, he said: “That’s the billion-dollar question.”
Meredith Kopit Levien, executive director of The New York Times, sits on Instacart’s board.
Instacart celebrated its IPO by ringing the Nasdaq opening bell at its San Francisco office with more than 1,000 employees and “lots of food,” Ms. Simo said.