Startup IPOs

tl;dr

• Initial Public Offering (IPO) is a much-famed exit route for the startup stakeholders (investors, founders, employees, etc.).
• The IPO world is changing. In 2021, the median company age at IPO was 11 years. Private companies going for an IPO are more mature than typical tech company at IPO in the '80s-90s.
• Macro instability has resulted in - a slow IPO market and a lack of M&A. The year 2023 is on pace to be the slowest year for exit value since 2009. Baring the recent outlier story of IPO success in 2021, the year 2023 is proving challenging for IPOs across geographies.
• Even after the IPO, the challenges don't end. Post-IPO performance of tech companies has not been rosy, and stock prices can take up to a couple of years to recover.
• Three IPOs in September (Instacart, Arm, and Klaviyo) have reignited optimism, and investors have started deciphering market trends and signals.
• While every IPO is inherently different, a few common characteristics have defined these above three IPOs - (a) investor's focus on company profitability, (b) low float (10% or less), (c) jump in share price on the "first trading day" providing exit opportunity, (d) drop in share price post in weeks after IPO pop, and (e) cornerstone/strategic investors who would commit ahead of time to buying a chunk of the IPO.
• Nevertheless, a large backlog of tech startups is in line for IPO in the coming quarters (around 77, according to PitchBook).

Successful exits are what most startup stakeholders look forward to in the ecosystem. But it is only achievable in a few cases. In an average 'good IPO year' there are 50 companies that go public. So what happens to the rest? Many are strategically acquired (the likelihood of a startup acquisition vs. being IPO'ed is almost 30:1 - link for HBR article). Then, there are more disturbing outcomes like shutdowns.

In the truest sense, IPOs are about raising capital. Then there are other reasons, like bringing onboard different sets of investors and providing liquidity for the initial investors/employees.

But IPOs today (and the capital markets environment) differ from what they were 10/20/30 years ago.

Scott Galloway recently published a blog article. Quoting a few important lines from the article:

• The traditional IPO construct is in structural decline, and that’s a symptom of a fundamental shift in the capital markets.
• The problem isn’t that IPOs have become a pump and dump scheme (often they are). The problem is that they don’t matter. The center of gravity is shifting from public to private capital. The change has been incremental, so it doesn’t get much media attention.
• In 1980, 9 out of 10 tech IPOs were profitable. In 2021, it was 1 in 5. Among all venture-backed companies, in 1980, 78% were profitable; in 2021, 10%. Among the 13 VC-backed companies that went public in 2022, not one was profitable.

A post from Nik Talreja highlights a few critical changes on the IPO topic.

• In 1980, the median company age at IPO was six years. In 2021, the median age was 11. In 1980, the median market value of a company at its IPO (adjusted for inflation) was $105M. In 2021, the median market value was $1.3B.
• ~10 year-old private companies are much more mature than the typical tech company at IPO in the '80s-90s. Mature companies = positive margins, flatter growth curves, and predictable value creation on a go-forward basis.
• For the first time in a while, public company market values are on par with private company market values. This makes IPOs more attractive for late-stage companies and investors. There's no "private premium" and being private means limited liquidity for all.

Challenging environment for exit

According to PitchBook - "Macro instability has shown through in VC-backed exits data. With the slow IPO market and a lack of M&A, 2023 is on pace to be the slowest year for exit value since 2009."

2023 hasn't been friendly to the IPO exit market. As of August 2023, 73 IPOs in the U.S. (including Arm) have raised $14.8 billion, according to Renaissance Capital, which tracks public offerings. That’s a fraction of the listings during 2021, when 397 companies raised $142 billion. There hasn’t been a notable venture-backed tech IPO in the U.S. since late 2021.

What about Europe?

Europe has suffered from poor exit scenarios for startups, and even when that happens, poor performance plagues Europe's VC-backed IPOs. (check out the excellent piece from PitchBook LINK). 72% of VCs in the EU believe the exit environment worsened significantly in 2023 ( European Investment Fund (EIF) Study - Link).

A dramatic shift has unfolded since the glorious peak of 2021. As of August 2023, Europe was hurtling toward its lowest IPO count in over a decade. A mere 13 VC-backed IPOs made their grand debut, their combined value barely a whisper at around €183 million. This starkly contrasts with the previous year, where 51 IPOs collectively tallied €3.1 billion.

Post-IPO, the performance of tech companies has not been rosy

• U.S.: Over the last 50 years, there have been several significant declines in initial public offerings (IPOs), and in each instance, it has taken a minimum of two years for them to bounce back. Within the set of 2021 U.S. IPOs that secured $500 million or more, the median offering has currently lost 23% of its value.

• Europe: Among the 53 VC-backed European businesses that went public since the beginning of 2022, 64.2% found themselves below their listing price. Of those VC-backed European companies whose share prices had plunged, 19 witnessed a descent of over 50%. 

Recent IPOs

We have already seen three IPOs (in late September Instacart, Arm, and Klaviyo). The run-up to the IPO always promises a much-needed dose of optimism. Offerings like these are often beacons to try to decipher what is the sentiment overall of the market. Investors' reactions pre-IPO showed just how eager investors are for good news.

Case of Instacart

(Goodwater did an excellent analysis on Instacart company - LINK )

There was a wall of excitement over Instacart’s highly anticipated IPO in September. Let's unravel what all happened:

• Instacart debuted with a market cap of about $10 billion.
• IPO slashed 75% from the company’s last private valuation ($39 billion price tag investors had put on it in March 2021).
• In the Instacart IPO, insiders like investors, founders, and employees sold their shares and it represented around 36% of the IPO. Instacart did confirm that they were only selling existing shares. Their press release clearly stated: “Instacart will not receive any proceeds from any sale of shares by the selling stockholders.”
• Instacart's free float stood at below eight percent.
• IPO left some late investors underwater. A post from Brian Rumao highlights the tough outcome for late investors. Another post from Jamie Rhode, CFA , nails it - "With Instacart’s IPO happening, I think it's an important reminder that one of the key benefits of investing at the earliest stages of venture capital is the low-cost entry point."

• On its trading debut in September, Instacart jumped as much as 43%.
• As of 18th Oct, Instacart is down 18%
• After receiving a lukewarm reception, with zero analysts recommending investors buy the stock, Instacart now has nine buy ratings, seven holds, and one sell. (Bloomberg Link)

Case for ARM

UK chip designer Arm Holdings, backed by SoftBank Group Corp., raised around $5 billion.

• Arm’s case was a return to public markets — it was publicly traded until SoftBank acquired it.
• Closed up 25 percent on the first day of trading
• Free float stands at around 10 percent
• As of 18th Oct, ARM is down 15%

Case of Klaviyo

Klaviyo is a developer of a marketing automation platform with large and fast-growing revenue.

• The stock popped to $36.75 in debut, above its IPO price of $30.
• Klaviyo's free float stands at around 7.5 percent
• As of 18th Oct, Klaviyo is down 3%
• Profitability: Klaviyo’s revenue increased 51% in the latest quarter from a year earlier to $165 million, and the company swung to profitability, generating almost $11 million in net income after losing $11.7 million in the same period the prior year.

The above 3 IPOs are not traditional and yet have similarities. Few points:

1. Investor's focus on company profitability
2. Low float (10% or less)
3. Jump in share price on the "first trading day" providing an exit opportunity
4. After-market (and intraday) volatility has made discovering and analyzing share price action difficult.
5. Drop in share price post in weeks after IPO pop.
6. Cornerstone/strategic investors who would commit ahead of time to buying a chunk of the IPO.

Even though, in a broader sense, we talk about IPOs as the single most prominent feature of a startup exit, the reality is that each IPO is unique. One point is clear - the days of going public without a clear path to profits are over, at least for now.

Who's next in the IPO line?

Almost all names mentioned below are unconfirmed and, in some cases, result of speculation/hearsay. Not investment advice!

Crunchbase published an article (Link) as early as July 2023 on 'Who Could Still Go Public In 2023?'. They highlighted 11 startups. One sample is below.

Marcel van Oost does an excellent job in the FinTech category. A few companies mentioned in his newsletter:

• 🇬🇧Thought Machine considers multi billion-pound IPO to reignite listings market. The company is reportedly seeking advice from bankers in a move that has the potential to rejuvenate the stagnant listings market. Read on
• 🇺🇸Armed with $40M in fresh capital, fintech Stash says it’s moving toward an IPO. CEO Liza Landsman describes the move as a win for Stash, a startup that aims to offer lower and middle income consumers an affordable way to invest, and has aspirations to go public in the relatively near future.
• 🇦🇪UAE’s Tabby gets ready to relocate HQ to Saudi Arabia ahead of IPO on Tadawul. The move aims to amplify their reach and impact, aligning with the Kingdom's goal of promoting financial inclusion and literacy, essential for the country's economic growth. 
• 🇦🇺Klarna injects $141m into Aussie arm ahead of IPO. The massive capital injection comes at a critical moment for Klarna and the Australian BNPL sector as a whole. The recapitalisation of the Australian business might help stabilize areas of the group facing deep and unsustainable losses.

PitchBook did a whole list for the SaaS category. Some startups are mentioned below; for the rest, check out the list HERE.

PropTech (as reported in Bisnow article)

• "... a number of strong proptech companies that could be ripe for IPOs, such as VTS, Roofstock and Veev, all of which have been successful at raising money privately.
• In September, Kin, which offers homeowners insurance on a direct-to-consumer basis, closed on a $33M Series D round and has raised $265M in equity so far.
• Last year, VTS closed on its Series E funding round totaling over $125M, the largest round of capital the company has raised. Roofstock raised $240M in a Series E financing round, and Veev picked up $400M in Series D funding."

As reported in Bloomberg (LINK) Waystar, a health payments software maker, "... filed for an initial public offering, a sign that US equity capital markets aren’t returning to a deep freeze after four key listings delivered mixed results."

Who's reconsidering or delaying?

• According to a Bloomberg article (Link) - "The debut dud is already prompting other companies that had been targeting near-term listings to reconsider their timelines. Triton earlier postponing its planned share sale for military gearbox maker Renk AG. A few hours before Birkenstock began trading, French software company Planisware postponed its IPO on Euronext Paris, citing challenging market conditions."
• ".....Those putting their IPO plans on a slower track include Microsoft Corp.-backed cloud and data security startup Rubrik Inc. and car-sharing business Turo Inc., according to people familiar with the matter. Rubrik and Turo’s IPO timings aren’t finalized and could still change."
• According to Bloomberg (Link) - "The mixed performance by those three and now Birkenstock sharpen the focus on whether dozens of startups that have been eying the public market will decide to move ahead or keep waiting. Those companies include an array of diverse businesses such as activewear brand Vuori Inc., weight-loss drugmaker Carmot Therapeutics and GameChange Solar, whose backers include a Koch Industries affiliate, among other candidates"

The End.