Title: Instacart Makes Successful IPO Debut, Reflecting Investor Demand for Profitable Tech Companies
Subtitle: Shares of Instacart close first day of trading at $33.70, signaling renewed interest in new listings
San Francisco, CA – After a two-year absence in the market, initial public offerings (IPOs) have made a strong comeback, with grocery delivery company Instacart leading the way. Instacart’s shares closed their first day of trading on Tuesday at $33.70, up 12 percent from their IPO price of $30, illustrating the growing investor appetite for young tech firms – but only at the right valuation.
Instacart’s market capitalization, including outstanding shares, reached $11.1 billion. However, this figure falls significantly short of the company’s peak valuation of $39 billion assigned by private market investors in 2021. The disparity serves as a sharp reality check for start-ups that raised funds at inflated valuations.
Fidji Simo, CEO of Instacart, acknowledged that the company’s current valuation reflects changes in public stock prices, despite its improved performance and profitability over the past two years.
Simo stated, “The markets will always ebb and flow. I am more focused on what I can control.”
The tech and finance industries have anxiously awaited new IPOs due to hopes of increased listings. However, a myriad of challenges such as inflation, rising interest rates, and an overall economic downturn dampened investor confidence in tech companies, causing a freeze in IPO activity for the past two years. During this period, only 144 companies went public in the United States, raising $22.5 billion, compared to the 397 IPOs that raised $142 billion in 2021, according to Renaissance Capital.
However, the tide seems to be turning as Arm, a chip designer owned by SoftBank, recently went public and experienced a 25 percent surge on its first day of trading. This successful IPO renewed optimism and gave hope that more investors would inject capital into the tech sector.
With a backlog of companies eager to tap into the public market, there are over 1,400 private start-ups with a combined value of more than $4.9 trillion that could potentially go public, as reported by EquityZen. Prominent among them are social media giant Reddit, ticketing start-up SeatGeek, and car rental company Turo.
Klaviyo, a marketing software start-up, is also set to make its IPO debut this week with a valuation of $9.5 billion when it was privately held.
In contrast to previous years, investors now prioritize profitability when evaluating a company’s prospects prior to going public. Both Instacart and Klaviyo have defied expectations, with Instacart recording $428 million in profit on $2.5 billion in revenue in the previous year through its expansion into various business segments. Klaviyo, although it incurred losses last year, registered a $15 million profit on $320 million in revenue in the first half of 2022.
Kyle Stanford, an analyst at PitchBook, stated, “Taken together, Instacart and Klaviyo show that the bar for investor expectations in a company’s IPO has risen significantly. Profitability will be key.”
Although public market investors have raised questions about Instacart’s future growth, they have placed a substantial premium on the company’s profitability, according to Simo.
Instacart, founded in 2012, faced numerous challenges throughout its journey. Initially positioned as a grocery delivery service connecting customers with contract workers, the company garnered scrutiny, similar to other gig economy firms, over the classification and compensation of its workers.
During the early days of pandemic lockdowns, Instacart experienced a surge in customer demand. However, the subsequent decline in growth raised concerns about the company’s long-term sustainability. In response, Apoorva Mehta, Instacart’s co-founder and former CEO, stepped down and was succeeded by Ms. Simo, a former executive at Meta.
Under Simo’s leadership, Instacart shifted its focus towards advertising and grocery software businesses, which bolstered the company’s profitability.
As Instacart made its stock market debut, Mehta reflected on the company’s journey, remarking, “During the first few years, it wasn’t clear to the industry whether Instacart was here to stay. I don’t think that’s a question any longer.”
As part of its IPO, Instacart privately sold shares to investors, including PepsiCo, one of its advertising clients, which purchased $175 million worth of shares. Simo stated that this move strongly influenced market sentiment.
Sequoia Capital and D1 Capital are among Instacart’s largest external shareholders, with Sequoia holding a 19 percent stake and D1 Capital holding 14 percent. Mehta still retains an 11 percent stake, which is currently valued at approximately $976 million. When asked about his plans for the windfall, Mehta humorously replied, “That’s the billion-dollar question.”
Meredith Kopit Levien, Chief Executive of The New York Times, serves on Instacart’s board.
To celebrate its listing, Instacart rang the Nasdaq opening bell at its San Francisco office in the company of over 1,000 employees and an abundance of food, as shared by Simo.
With the successful debut of Instacart and investor demand for profitable tech companies, the IPO market is gradually regaining momentum, giving hope to numerous start-ups eager to go public and attract investor capital.