The IPO market is showing signs of life again, and it's not business as usual. Last week, chip designer Arm made a splash with its $54.5 billion Nasdaq debut, the largest new listing in nearly two years. Hot on its heels, tech unicorns Instacart and Klaviyo also went public, with valuations of $10 billion and $9.2 billion, respectively. While these developments are promising, they come with new dynamics that private market investors and startups should note.
Profitability Takes Center Stage
In the previous IPO cycle, companies like Uber, Lyft, and WeWork captivated investors with their growth stories, often sidelining profitability. This time, the narrative has shifted. Both Instacart and Klaviyo can pitch profitability alongside growth, a sign that stock-market investors are becoming more discerning. Arm, with its 30-year history of deep tech innovation, adds another layer of credibility to this trend. For private market investors, this means that portfolio companies must not only scale but also demonstrate a clear path to profitability.
"In this new era of IPOs, the focus has shifted from mere growth to sustainable profitability. This is a welcome change that aligns with our investment philosophy at MarketX Ventures. We've always believed in backing companies that not only have the potential for rapid growth but also have a clear roadmap to profitability. The recent IPOs validate our approach and signal a more mature, discerning market," says Cathryn Chen, Founder & CEO of MarketX Ventures.
A Reality Check on Valuations
The recent IPOs also revealed a more sober approach to valuations. Instacart's IPO valued it at just a quarter of its 2021 private market valuation, while Klaviyo's valuation was slightly below its July 2022 figure of $9.5 billion. Notably, ARM's valuation at its IPO was approximately 25% of the value that SoftBank invested at earlier this year. This willingness to accept lower valuations suggests a recalibration in market expectations. For private market investors, this could mean more conservative valuations for portfolio companies, impacting both fundraising and exit strategies.
Geopolitical Shifts in the IPO Landscape
The global IPO landscape is also undergoing subtle changes. Arm's decision to list in New York instead of London has sparked concerns about the future of tech IPOs in the UK. Meanwhile, geopolitical tensions between the U.S. and China are casting a shadow over some planned IPOs in China. These developments could influence where companies choose to go public, adding another layer of complexity to investment strategies.
The Backlog Challenge
Despite the renewed activity, the IPO market is far from a free-for-all. Hundreds of companies are still waiting for improved market sentiment. Investors will scrutinize price, profitability, and location closely. This backlog could lead to a bottleneck, especially if market conditions shift rapidly. Private market investors must be prepared for this scenario, possibly considering alternative exit strategies like M&A or direct listings.
The Road Ahead
The recent jolt in IPO activity could energize private capital exits and prompt a resumption of global M&A activities in 2024. However, buyer selectivity remains a constant. As we noted in our latest valuation update, the IPO slump was quickly followed by an increase in down rounds, write-offs, and restructures. The market is far from forgiving, and companies must be prepared to meet its demands.
These developments offer both challenges and opportunities. The focus on profitability may require a reevaluation of investment criteria, while the geopolitical shifts could necessitate a more flexible approach to exit strategies. However, the resurgence in the IPO market can open "old doors" for high-performing portfolio companies, offering a much-needed exit route after a challenging period.
The IPO market may be returning, but it's not the same as before. As private market investors, we must adapt to these new dynamics to successfully navigate the evolving landscape. The time for change is now, and the opportunities are ripe for the taking.
