After about a year-and-a-half without liquidity prospects, investors and employees of some of the largest unicorns may see a glimpse of light at the end of the tunnel.
Last week's IPO filings of Instacart and marketing automation company Klaviyo mean that once they debut, various types of investment activity—from new late-stage rounds and secondaries trading to other public offerings—are likely to see a pickup. That is in large part because there will finally be more clarity about what private companies are worth.
Since the tech downturn started in early 2022, buyers and sellers of private companies have been at loggerheads, each unwilling to accept the other's price. Venture investors have been pointing to valuations of previously VC-backed public companies, but they also want to see how newer IPOs price.
"When IPOs happen, that will show primary and secondary markets where values should be," said Hans Swildens, the founder and CEO of Industry Ventures, one of the oldest and most prominent secondary VC firms that also backs new VC rounds and funds. “If a company went public 10 years ago, and it's trading today, it’s not the same thing as if a company goes public next quarter. An IPO is a price discovery mechanism.”
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Swildens and other secondary investors are convinced that the coming IPOs will help buyers and sellers of venture funds and individual company stakes close the valuation gap.
“If the IPO market is functioning well, everyone's going to get a little bit more comfortable purchasing and selling [companies],” Swildens said.
Investors should certainly be prepared for steep discounts from pandemic-era highs.
Back in 2019, VC-backed companies that had recently gone public had an enterprise value of around 5x their revenue. By mid-2021, that valuation metric had skyrocketed to over 22x, only to fall to around 5x again in recent quarters.
How much of a haircut late-stage VC-backed companies will have to endure will become clear after the newly public companies register at least several weeks of trading.
Zeroing in on valuations won't just help institutional investors: The marks will also likely be highly valuable to employees of dozens of pre-IPO companies. During the pandemic-era VC boom, there was a vibrant secondary market ready to scoop up these employee shares. But since last year, selling shares to secondary investors has become very difficult—even for employees who were prepared to let go of their stock at steep discounts. Seller's dilemma IPO pricing seems bound to increase the secondary trading activity of many late-stage companies once it is easier to gauge valuations. The question then becomes: Should sellers take advantage now or risk waiting for an eventual IPO?
IPO advisers say that unless Instacart and Klaviyo stocks perform exceptionally well, they don't anticipate any more VC-backed companies to make their public debuts this year. Although several other companies have IPO paperwork nearly ready, it's unlikely that they have enough time to squeeze in a listing before the end of 2023, IPO advisers say.
"We've got a pretty good pipeline for late Q1 and Q2 of next year," said Ran Ben-Tzur, a partner with law firm Fenwick. He added that it's still hard to say how large that cohort of IPO hopefuls will be because its size will depend on how Wall Street will receive Instacart and Klaviyo stocks.
The companies currently contemplating next year's listings are not under the gun to go public. They have plenty of cash, and just like Instacart and Klaviyo, they are either profitable or within six quarters of a positive bottom line, Ben-Tzur said.
Advisers say employee and investor liquidity are the main impetus for considering an IPO. Public markets are not where late-stage cash-strapped companies can expect to get their next capital infusion—at least in this market environment.
All of this means that, for now, Instacart's and Klaviyo's IPOs will have a bigger impact on the valuations of primary rounds and secondary trading than on the IPO pipeline.
Correction: An earlier version of this article named the wrong exchange for Klaviyo's IPO. The company will list on the NYSE. (Sept. 1, 2023)
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This article originally appeared on PitchBook News