Monday, 2 October 2023

Business News

Tech IPOs are back, deal valuations are rising. Don’t get fooled again

Tech IPOs: There won't be 'one set success rate' in the coming quarter, analyst says

Shopper using Instacart

Source: Instacart

As tech startups test the IPO market again, they are pushing up their valuations.

After last week’s successful market debut of chip company Arm, two of the most eagerly anticipated IPOs of former high-flying startups have upped their initial public offering valuations — online grocery firm Instacart and marketing automation company Klaviyo.

But don’t be fooled. In upping IPO ranges, tech stocks are still coming out humbled by the post-2021 IPO market slump. The slate of recent and planned tech initial public offerings will test the market’s appetite for new stocks, and experts say the overall IPO resurgence could be slow — and not without bumps.

Instacart and Klaviyo are both expected to make their debuts on the public market as soon as this week. Arm’s jump of nearly 25% during its first trading day Thursday marked the end of a quiet two years for tech IPOs. But these companies are coming to market in a much different environment than those that went public during the IPO, SPAC and meme stock frenzies of 2020 and 2021. Since then, companies have been contending with record-high inflation, interest rate hikes, concerns for the banking sector, and volatile markets.

The majority (70%) of 73 IPOs year-to-date were trading below their IPO price at the time of Arm’s deal, but most are smaller cap companies, and about half are based outside the U.S.

“We see this as a major turning point,” Matt Kennedy, senior IPO market strategist for Renaissance Capital, said of the first major tech IPOs of the year. “This has been the slowest IPO market in over a decade and we seem to be finally coming out of that.” 

Investors are struggling to assess what companies are worth and are waiting for the IPO market to pick back up, said Ray Wang, principal analyst and founder at Silicon Valley-based Constellation Research.

“It’s a valuation game and what we’re all trying to figure out right now is, what are they really worth?” Wang said. Growth expectations are down, the availability of funding for these types of investments is down, and many investors are still sitting on the sidelines, he added.

Debuting in an uncertain market means companies and investors have had to say goodbye to the soaring valuations they saw when the IPO market was buzzing two years ago. But Instacart raised its valuation target on Friday to up to $10 billion from as much as $9.3 billion after Arm’s successful market debut. That is still a steep decline from the…

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