Cut-Price IPOs: Risky or Rewarding Opportunities?

Chatterbox Moo wrote a column · Sep 13, 2023 04:54

A wave of upcoming tech IPOs is revitalizing the new listings market. However, most of these startups are expected to fetch diminished valuations, indicating investors' cautious approach towards former high-flying startups.

The Instacart offering is one of the first tests of investor sentiment for VC-backed tech start-ups on public markets in about two years.

Cut-Price IPOs: Risky or Rewarding Opportunities?

Although demand for the upcoming IPOs appears strong, it is fuelled by sharp discounts to previous valuations. For instance, Instacart is seeking a valuation over 75% below the level at which it last raised cash in 2021. Klaviyo's target is some 13% below its last funding round valuation in July 2022, according to data from PitchBook. While Arm is coming out with a valuation $15 billion lower than what experts predicted weeks ago.

Instacart has characteristics that became hated in the last two years: grocery, delivery, logistics or operations — all these companies used to be darlings and became very shunned," said the head of a large sovereign wealth fund that has invested in many late-stage tech start-ups in the US. "It is the first of those companies out of the gate. It will be very important."

Instacart is part of a group of start-ups that burned through venture capital in pursuit of rapid growth in the boom years leading up to the end of 2021, gaining multibillion-dollar valuations in the process. However, they have since had to reduce costs drastically, endure lower growth trajectories, and accept far lower valuations due to an economic downturn that battered public tech stocks and caused venture capital streams to dry up.

The lower valuations may indicate bankers' desire to be conservative with pricing in order to generate a first-day rally in shares. This strategy could pave the way for other potential IPOs, with many market participants agreeing that there is plenty of cash available to take stakes in private companies if the pricing is appropriate.

$Savers Value Village(SVV.US)$ and $CAVA Group(CAVA.US)$ both used these tactics and have both rallied from their IPO prices.

With Instacart specifically, the huge drop from pre-IPO market valuations also underlines the risk in participating in the much-hyped pre-IPO market," wrote Josef Schuster, founder and chief executive officer of IPOX Schuster.

Here's the list of returns from IPO price with companies that have market cap over 2 billion.