Instacart’s low-priced IPO tests Wall Street’s appetite for new tech listings

Instacart Inc. has set a price range for its initial public offering that values ​​the online grocery delivery company at up to $7.7 billion, less than a fifth of the private valuation it enjoyed two years ago, in a litmus test for the new technology.

The San Francisco-based e-commerce company is being closely watched by other private technology groups and their investors who believe it could trigger a wave of initial public offerings at stock valuations far lower than those paid by venture capitalists in an industry-wide boom during Coronavirus pandemic.

Instacart announced Monday that it would offer 22 million shares, or 8 percent of the company’s stock, at a price of $26 to $28 per share. This would raise up to $616 million and value the company at between $7.17 billion and $7.73 billion. Shares are expected to begin trading next week.

This price range is painful for venture capital groups who bought $265 million worth of shares in the company based on a $39 billion valuation in 2021.

Instacart’s offering, which begins its investor roadshow this week, is one of the first tests of investor sentiment for venture capital-backed technology startups in the public markets in about two years. This comes as a window has been opened for initial public offerings by British chip designer Arm, which will list this week at an expected valuation of $52 billion, making it the largest listing of the year.

“Strong reception for Arm is a necessary but not sufficient condition for VC-backed companies to get to market,” said Eric Liao, VC Group IVP.

Many venture capital firms see Instacart as a better barometer of Wall Street’s appetite for tech listings than Arm, a mature and profitable company being brought back to the public markets by a single owner, Japanese conglomerate SoftBank.

“[Instacart] “It would be a good indicator of what investors are looking for in the general market,” said Kyle Stanford, senior analyst at private market data firm PitchBook. “If it does poorly, it will close the door to venture capital-backed companies. If it does well, a couple more might apply.”

The group, led by former Facebook CEO Fidji Simo, lowered its valuation to $12 billion as part of an internal accounting process earlier this year. This would have prompted some venture capital investors to write down some of the value of their holdings. However, these investors will have to recognize any losses on their investment in Instacart when the company goes public.

Sequoia Capital and Khosla Ventures, two of Silicon Valley’s largest venture capital groups, have participated in the bulk of Instacart’s funding rounds since its first significant round in 2013 and remain positioned to make gains from the IPO despite the lower valuation .

More money was invested in subsequent years as the company’s valuation grew. D1 Capital started investing in 2018, for example, while mutual funds like Fidelity and T Rowe Price debuted in 2020, according to data from PitchBook. More than a dozen small-cap funds invested for the first time at the peak of Instacart’s valuation in 2021, according to PitchBook. Instacart has raised more than $2.7 billion from investors in total.

Sequoia owns about 15 percent of Instacart, or 51 million shares, making it among the startup’s largest venture capital backers, according to a person familiar with the matter. The company has invested about $300 million in Instacart across its funding rounds, including 2021, the source said. If Instacart is listed at a $10 billion valuation, Sequoia’s current stake would be worth about $1.5 billion. Sequoia declined to comment.

In an unconventional move, Sequoia and several other private backers of Instacart will buy more shares in the IPO. This group, which also includes Norges Bank, TCV, Valiant Capital and D1 Capital, will buy about $400 million in Instacart stock as cornerstone investors, according to company filings.

Venture capital groups typically disburse early investments when their portfolio companies list. The move signals optimism that Instacart could rise in the public markets.

A person close to Instacart’s IPO said the big cut in its valuation since 2021 was despite the group this year reporting its first earnings. Earnings improved from a net loss of $74 million in the first half of 2022 to net income of $242 million in the first half of this year, according to recent filings.

Late-stage tech startups hoping to list while reporting a loss will likely face tougher IPO valuations, the person said.

“Instacart has characteristics that have become reviled in the last couple of years: grocery, delivery, logistics, operations — all of these businesses that were beloved have become very reviled,” said the head of a large sovereign wealth fund that has invested in many latecomer companies. Stage of technology startups in the United States. “It’s the first of those companies out of the gate. It’s going to be very important.”

Instacart is one of a group of startups that used venture capital to deliver rapid growth in the boom years through the end of 2021, earning billion-dollar valuations on the way.

Since then, startups have been forced to dramatically cut costs, lower growth trajectories, and take on much lower valuations as a result of the economic downturn that has hurt public technology stocks and caused venture capital wells to dry up. Last week, it emerged that Getir, a Turkey-based grocery delivery startup, had cut its valuation from $11.8 billion early last year to $2.5 billion, as it raised $500 million in new capital.

In this tougher environment, many startups have resisted raising new shares to avoid the associated value dilution. If Instacart can successfully list at a valuation below its peak mark, it will set an important precedent for other IPO candidates.

Marketing automation company Klaviyo also announced IPO pricing on Monday. It said it would sell 19.2 million shares at a price of $25 to $27 per share. This would value the company at up to $6.3 billion. Its recent value was estimated at $9.5 billion.

A few other companies, including software company Databricks and identity verification startup Socure, are among the startups that could be listed after Instacart’s successful IPO, according to investors in those companies.

Instacart’s IPO bankers, led by Goldman Sachs and JPMorgan, will begin marketing the company to investors this week. The company plans to list on the Nasdaq under the ticker symbol CART.

This article was updated after Instacart and Klaviyo pricing was announced