Wall Street’s ‘meh’ response to tech IPOs shows Silicon Valley’s valuation problem
Instacart celebrates their IPO at the Nasdaq on Sept. 19th, 2023.
Courtesy: Nasdaq
After a 21-month tech IPO freeze, the market has cracked opened in the past week. But the early results can’t be encouraging to any late-stage startups lingering on the sidelines.
Chip designer Arm debuted last Thursday, followed by grocery delivery company Instacart this Tuesday, and cloud software vendor Klaviyo the following day. They’re three very different companies in disparate parts of the tech sector, but Wall Street’s reaction has been consistent.
Investors who bought at the IPO price made money if they sold right away. Just about everyone else is in the red. That’s fine if a company’s goal is just to be public and create the opportunity for employees and early investors to get liquidity. But for most companies in the pipeline, particularly those with sufficient capital on their balance sheet to stay private, it offers little allure.
“People are worried about valuations,” said Eric Juergens, a partner at law firm Debevoise & Plimpton who focuses on capital markets and private equity. “Seeing how those companies trade over the next couple months will be important to see how IPO markets and equity markets more generally are valuing those companies and how they may value comparable companies looking to go public.”
Juergens said, based on his conversations with companies, the market is likely to open up further in the first half of next year simply because of pressure from investors and employees as well as financing requirements.
“At some point companies need to go public, whether it’s a PE fund looking to exit or employees looking for liquidity or just the need to raise capital in a high interest rate environment,” he said.
Arm, which is controlled by Japan’s SoftBank, saw its shares jump 25% in their first day of trading to close at $63.59. Every day since then, the stock has fallen, and it closed on Thursday at $52.16, narrowly above the $51 IPO price.
Instacart popped 40% immediately after selling shares at $30. But by the end of its first day of trading, it was up just 12%, and that gain was practically all wiped out on day two. The stock rose 1.8% on Thursday to close at $30.65.
Klaviyo rose 23% based on its first trade on Wednesday, before selling off throughout the day to close at $32.76, just 9% higher than its IPO price. It rose 2.9% on Thursday to $33.72.
None of these companies were expecting, or even hoping for, a big pop. In 2020 and 2021, during the frothy zero interest rate days, first-day jumps were so dramatic that bankers were criticized for handing out free money to their buyside buddies, and companies were slammed for leaving too much cash on the table.
But the lack of excitement over the past week — amounting to a collective “meh” across Wall Street — is certainly not the desired outcome either.
Instacart CEO Fidji Simo acknowledged that her company’s IPO wasn’t about trying to optimize pricing for the company. Instacart only sold the equivalent of 5% of outstanding shares in the offering, with co-founders, early employees, former staffers and other existing investors selling another 3%.
“We felt that it was really important to give our employees liquidity,” Simo told CNBC’s Deirdre Bosa in an interview after the offering. “This IPO is not about raising money for us. It’s really about making sure that all employees can have liquidity on stocks that they work very hard for. We weren’t looking for a perfect market window.”
Odds are the window was never going to be perfect for Instacart. At the tech market peak in 2021, Instacart raised capital at a $39 billion valuation, or $125 a share, from top-tier investors including Sequoia Capital, Andreessen Horowitz and T. Rowe Price.
During last year’s market plunge, Instacart had to slash its valuation multiple times and switch from growth to profit mode to make sure it could generate cash as interest rates were rising and investors were retreating from risk.
Growing into valuation
The combination of the Covid delivery boom, low interest rates and a decade-long bull market in tech drove Instacart and other internet, software and e-commerce businesses to unsustainable heights. Now it’s just a matter of when they take their medicine.
Klaviyo, which provides marketing automation technology to businesses, never got as overheated as many others in the industry, raising at a peak valuation of $9.5 billion in 2021. Its IPO valuation was just below that, and CEO Andrew Bialecki told CNBC that the company wasn’t under pressure to go public.
“We’ve got a lot of momentum as a business. Now is a great time for us to go public especially as we move up in the enterprise,” Bialecki said. “There really wasn’t any pressure at all.”
Klaviyo’s revenue increased 51% in the latest quarter from a year earlier to $165 million, and the company swung to profitability, generating almost $11 million in net income after losing $11.7 million in the same period the prior year.
Even though it avoided a major down round, Klaviyo had to increase its revenue by about 150% over two years and turn profitable to roughly keep its valuation.
“We think companies should be profitable,” Bialecki said. “That way you can be in control of your own destiny.”
While profitability is great for showing sustainability, it isn’t what tech investors cared about during the record IPO years of 2020 and 2021. Valuations were based on a multiple to future sales at the expense of potential earnings.
Cloud software and infrastructure businesses were in the midst of a landgrab at the time. Venture firms and large asset managers were subsidizing their growth, encouraging them to go big on sales reps and burn piles of cash to get their products in customers’ hands. On the consumer side, startups raised hundreds of millions of dollars to pour into advertising and, in the case of gig economy companies like Instacart, to entice contract workers to choose them over the competition.
Instacart was proactive in pulling down its valuation to reset investor and employee expectations. Klaviyo grew into its lofty price. Among high-valued companies that are still private, payments software developer Stripe has cut its valuation by almost half to $50 billion, and design software startup Canva lowered its valuation in a secondary transaction by 36% to $25.5 billion.
Private equity firms and venture capitalists are in the business of profiting on their investments, so eventually their portfolio companies need to hit the public market or get acquired. But for founders and management teams, being public means a potentially volatile stock price and a need to update investors every quarter.
Given how Wall Street has received the first notable tech IPOs since late 2021, there may not be a ton of reward for all that hassle.
Still, Aswarth Damodaran, a professor at New York University’s Stern School of Business, said that with all the skepticism in the market, the latest IPOs are performing OK because there was a fear they could drop 20% to 25% out of the gate.
“At one level the people pushing these companies are probably heaving a sigh of relief because there was a very real chance of catastrophe on these companies,” Damodaran told CNBC’s “Squawk Box” on Wednesday. “I have a feeling it will take a week or two for this to play out. But if the stock price stays above the offer price two weeks from now, I think these companies will all view that as a win.”
WATCH: NYU professor explains why he doesn’t trust SoftBank-backed IPOs
Driverless WeRide robotaxis for Uber.
Courtesy: Uber
Uber on Wednesday rolled out fully driverless rides in its fourth market, launching the service in Abu Dhabi in partnership WeRide, a Chinese autonomous vehicle company.
The ride-hailing company said the launch in the United Arab Emirates capital represents the first driverless robotaxi service in the Middle East. In the U.S., Uber already offers robotaxi services in Austin, Phoenix and Atlanta through Alphabet’s Waymo.
Riders in Abu Dhabi can book a WeRide robotaxi when requesting an UberX or Uber Comfort ride, the ride-hailing company said.
WeRide, which is listed on the Nasdaq, formed its partnership with Uber in September 2024 and began offering autonomous rides with an operator on board in Abu Dhabi last December. Uber and WeRide also debuted robotaxi rides with a safety operator on board in Riyadh, Saudia Arabia, in October. In May, Uber said it plans to roll out the WeRide service to 15 more cities, including in Europe, over the next five years.
In recent years, Uber has bet big on autonomous vehicle technology through partnerships.
Uber started offering a robotaxi service in Austin and Atlanta earlier this year, and in Phoenix in late 2023. In July, the company landed a six-year robotaxi deal with electric vehicle maker Lucid and AV startup Nuro.
WeRide, meanwhile, has launched full driverless robotaxi services in China’s Beijing and Guangzhou, according to its website.
Uber has not said how it splits revenue from robotaxi rides with its partners.
Competitors have also readily adopted the technology, with Lyft announcing a deal with Waymo in September to launch robotaxis in Nashville next year.
Uber said the driverless vehicles in Abu Dhabi will operate in certain areas of Yas Island. Riders can boost their chance of a robotaxi drive by selecting the autonomous option. On-board support is available during the ride through the app and an in-vehicle tablet.
WATCH: WeRide CEO: We are using both Tesla and Waymo’s approach to scale robotaxi operations
Amazon’s new MK30 Prime Air drone is displayed during Amazon’s “Delivering the Future” event at the company’s BFI1 Fulfillment Center, Robotics Research and Development Hub in Sumner, Washington on Oct. 18, 2023.
Jason Redmond | AFP | Getty Images
Amazon is facing a federal probe after one of its delivery drones downed an internet cable in central Texas last week.
The probe comes as Amazon vies to expand drone deliveries to more pockets of the U.S., more than a decade after it first conceived the aerial distribution program, and faces stiffer competition from Walmart, which has also begun drone deliveries.
The incident occurred on Nov. 18 around 12:45 p.m. Central in Waco, Texas. After dropping off a package, one of Amazon’s MK30 drones was ascending out of a customer’s yard when one of its six propellers got tangled in a nearby internet cable, according to a video of the incident viewed and verified by CNBC.
The video shows the Amazon drone shearing the wire line. The drone’s motor then appeared to shut off and the aircraft landed itself, with its propellers windmilling slightly on the way down, the video shows. The drone appeared to remain in tact beyond some damage to one of its propellers.
The Federal Aviation Administration is investigating the incident, a spokesperson confirmed. The National Transportation Safety Board said the agency is aware of the incident but has not opened a probe into the matter.
Amazon confirmed the incident to CNBC, saying that after clipping the internet cable, the drone performed a “safe contingent landing,” referring to the process that allows its drones to land safely in unexpected conditions.
“There were no injuries or widespread internet service outages. We’ve paid for the cable line’s repair for the customer and have apologized for the inconvenience this caused them,” an Amazon spokesperson told CNBC, noting that the drone had completed its package delivery.
The incident comes after federal investigators last month opened a separate probe into a crash involving two of Amazon’s Prime Air drones in Arizona. The two aircrafts collided with a construction crane in Tolleson, a city west of Phoenix, prompting Amazon to temporarily halt drone deliveries in the area.
For over a decade, Amazon has been working to realize founder Jeff Bezos’ vision of drones whizzing toothpaste, books and other goods to customers’ doorsteps in 30 minutes or less. The company began drone deliveries in 2022 in College Station, Texas, and Lockeford, California.
But progress has been slowed by a mix of regulatory hurdles, missed deadlines and layoffs in 2023 that coincided with broader cost-cutting efforts by Amazon CEO Andy Jassy.
The company has previously said its goal is to deliver 500 million packages by drone per year by the end of the decade.
The hexacopter-shaped MK30, the latest generation of Amazon’s Prime Air drone, is meant to be quieter, smaller and lighter than previous versions.
Amazon says the drones are equipped with a sense-and-avoid system that enables them to “detect and stay away from obstacles in the air and on the ground.” The company recommends that customers maintain “about 10 feet of open space” on their property so drones can complete deliveries
The company began drone deliveries in Waco earlier this month for customers within a certain radius of its same-day delivery site who order eligible items weighing 5 pounds or less. The drone deliveries are supposed to drop packages off in under an hour.
Amazon has brought other locations online in recent months, including Kansas City, Missouri, Pontiac, Michigan, San Antonio, Texas, and Ruskin, Florida. Amazon has also announced plans to expand drone deliveries to Richardson, Texas.
Walmart began offering drone deliveries in 2021, and currently partners with Alphabet’s Wing and venture-backed startup Zipline to make drone deliveries in a number of states, including in Texas.
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