Instacart IPO: Don't expect an IPO rush just yet, analyst says

There are a lot of investors hoping that if companies like Arm (ARM), Instacart, and Klaviyo have successful market debuts, even more companies will go public. But that may not be the case, says Pitchbook Lead VC Analyst Kyle Stanford. Stanford warns that higher interest rates and high inflation are still hampering the IPO market. Stanford says that even if Instacart's debut goes well, "I don't think there's anything that really indicates to us that it's going to be a full-fledged rush back to the IPO market." When it comes time for companies to choose whether to go public or stay private, Stanford says it's a tough choice because "there's not as much money in the private markets now as there was... two years ago."

Video Transcript

- While the 2021 IPO boom led to a banner year for retail investors and the companies that raised more than $140 billion. But as markets pulled back in 2022, so did the market for listings that's starting to shift though.

According to Renaissance, capital filing activity is up almost 27% from last year. After Cava's big IPO and a volatile start from Vietnamese EV maker VinFast, investors are looking to SoftBank's arm and yes, grocery delivery app Instacart to keep the momentum going for IPOs.

Joining us now is Kyle Stanford, PitchBook Senior Venture Analyst. Kyle, good to talk to you today. So let's start with what we have learned from Instacart and this filing. I mean, last funding round in 2021, when they were still a private company, $39 billion. Now they're targeting upwards of $9.3 billion.

What does that mean for some of those companies that are waiting in the wings? How much is riding on Instacart's performance?

KYLE STANFORD: Sure. So I think the first thing it shows is just the difference in the market between 2021 and now, right? It's not like Instacart's revenues have declined. They've continued growing at a very fast pace for most of the-- or for a couple of years now.

But the revenue multiples and sales multiples that these companies are getting priced off in 2021 were astronomical compared to now. We have a VC-backed IPO index that tracks these four recently VC-backed companies. In 2021, it was upwards of 30X. Now, it's down to about 4 or 5X, right? Which is even a little more than what Instacart is going to get.

But what that does say is that even these companies and many other unicorns that will hopefully be coming through the system after Instacart are looking at a very challenging market, right?

About a quarter of the valuation for Instacart there, that's not necessarily a huge sign of success. But a strong performance in this IPO is going to generate a little more interest for VC-backed companies.

We still have Klaviyo that might be going out the same day or soon after. They can also continue the momentum forward. And hopefully, these two can get a few more companies to start to list and test these waters now.

- Kyle, if we do see a successful IPO here from Instacart and if we do see one from Klaviyo as well, I guess when you talk about that pickup in activity, how much of a pickup are you expecting to see given the fact that the macro environment right now is still a bit challenging?

KYLE STANFORD: Yeah, right. I'm not sure it's going to be a wide open window like many are hoping, right? That's what the market is-- really love. And a lot of investors would love to see that.

But it doesn't seem like that's going to be anytime in the near term because you're right. The interest rates are still very high. They're still maybe going up a little more. Inflation is still really high. A lot of the-- all of these indicators are much opposite from what many of these unicorn companies have or were seeing when they raised in 2021 or even early 2022.

So I expect a pretty calm market-- a calm re-entrance of the market through this year if Instacart goes out well. But I don't think there's anything that really indicates to us that it's going to be a full fledged rush back to the IPO market.

- So what is the conversation that's happening among these VC-backed unicorns? I mean, we talk about the valuation drop for Instacart even though the fundamentals for the company didn't necessarily change.

Does that provide a reality check to some of these private companies that are maybe looking to come to market who say, OK, this is the reality of what we should expect? Or do they choose to stay private for longer because there's more money to be had from the private side?

KYLE STANFORD: So that is something that is actually going to be a really, really big challenge for companies going forward. There's not as much money in the private markets now as there was a year ago or two years ago. And so that option is not necessarily there.

So what these companies will be looking for is, all right, what is the pricing that they're able to actually expect in the public market? Is it going to be a 20% to 50% down round? Is it going to be roughly flat to what the valuation they raised at their last round is.

That's going to be a big indicator of which companies are able to, you know, make this jump in this market. And both Instacart and Klaviyo, they both switched from money losing to a money making business, which is what investors are looking for.

So there's a lot going on but that stay private for longer is not necessarily going to be a good option either. We have over 51,000 private VC-backed companies, you know, currently still private, which is a huge number.

And when we see what happened to some of the large non-traditional investors, when the market crashes, they pulled out of VC pretty quickly. And so those late stage and venture growth stage companies that are right on the cusp of moving public or finding an exit do not have the same private capital availability that they were looking at two years ago.

So they're really in a difficult spot. And so we haven't seen any companies really be forced to exit yet. I think there's been a lot of conversations for companies in crowded markets whether there should be some M&A consolidation or maybe they should take an exit now rather than try to continue moving on, and growing in the private markets, and hope for a turnaround in the next year.

So a really difficult private market right now. And that capital availability is something that is not there. So trying to find an exit, whether that be through an IPO, Instacart will give a good idea of what pricing should be.

- And Kyle, given the fact that it seems like they have very, very little options, or few options, or attractive options, I should say, at this point when you talk about some of the M&A pickup or maybe more will be forced to turn to M&A, is this more of a tech specific story or do you think we're also going to see that play out across various sectors?

KYLE STANFORD: Yeah, right. I think when we look at what happened in 2021, and the exuberance in the market, and the number of companies that were getting funded in every category, this is not going to be necessarily a tech specific problem.

You look in health care. You can look in tech, especially. But any of these markets, they're very crowded right now. Again, 51,000 companies is well more than we've ever seen currently privately backed.

With fundraising levels pretty low through the first half of this year and going through Q3, there's not going to be a resurgence in capital availability. So it's not going to be a tech specific problem the way we see it.

- Kyle, finally, I'm kind of curious to get your take on the Arm IPO. There's a lot been made about the limited number of shares that will be available on the public market. How much SoftBank is actually hanging on to.

I mean, this is a company, yet again, that was-- got big bump from SoftBank in the massive share that they have. And yet, at the same time, there's a lot of interest in these chip makers, particularly around the enthusiasm around AI. How do you sort of weigh all the factors going into this IPO?

KYLE STANFORD: Sure, yeah. Arm is a very, very interesting case. And I think one thing that SoftBank is looking to do is really keep that cornerstone investment in their portfolio. They had Alibaba for a very long time and they were able to leverage their stakes in Alibaba to fund a lot of these other initiatives that they were looking to do.

Whether it be the Vision Fund whether it be adding more capital to Vision Fund II, they were able to do that through that stake. And Arm they believe is going to be a cornerstone investment for their portfolio moving forward.

Maybe it won't return what Alibaba did. But they're keeping a very tight grip on them because they know that this is a very well established company in many major markets. It's not a VC-backed IPO looking for growth, but it is very profitable. It is driving a lot of interest with the AI boom.

And SoftBank really digging deep into their AI strategy. They think arm is going to be what helps them continue to fund these initiatives and continue growth for themselves moving forward.

- Kyle Stanford, PitchBook Senior Venture Analyst. Good to talk to you. It'll be interesting to see how these IPOs perform. Appreciate your insight.

KYLE STANFORD: It will be an interesting couple of weeks. Yeah, thank you.