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The Realities of the Tech IPO Market: Early Results Show Concerning Signs for Late-Stage Startups


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### After a Long Wait, Tech IPOs Are Finally Happening
#### The recent surge in tech IPOs is not inspiring confidence among late-stage startups.

After a 21-month freeze, the tech IPO market has finally opened up again. However, the early results have not been promising for late-stage startups. Last week, chip designer Arm made its debut, followed by grocery delivery company Instacart earlier this week, and cloud software vendor Klaviyo the following day. While these companies operate in different sectors, their reception on Wall Street has been consistent.

Investors who bought shares at the IPO price were able to make a profit if they sold immediately. However, for everyone else, the results have been disappointing. This may not be a problem for companies whose main goal is to go public and provide liquidity for employees and early investors. But for most companies in the pipeline, especially those with enough capital to remain private, this lackluster performance is not appealing.

According to Eric Juergens, a partner at law firm Debevoise & Plimpton, who focuses on capital markets and private equity, people are concerned about valuations. The way these companies trade in the coming months will determine how IPO and equity markets value them and similar companies looking to go public. Juergens believes that the market will open up further in the first half of next year due to pressure from investors, employees, and financing requirements.

### Mixed Results for Recent IPOs
#### The stock prices of recently IPOed companies have been volatile.

Arm, which is controlled by SoftBank, saw its shares surge 25% on its first day of trading and then steadily decline since then. Instacart experienced a 40% jump immediately after selling its shares, but the gain was significantly reduced by the end of the first day, and the stock continued to decline on the second day. Klaviyo had a similar experience, with a 23% rise on its first day of trading, followed by a sell-off throughout the day. None of these companies were expecting a major increase in stock price, but the lack of excitement in the market is not ideal.

### Reasons for Going Public
#### Companies have various motivations for going public.

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Instacart CEO Fidji Simo explained that their IPO was not about optimizing pricing for the company. The main goal was to provide liquidity for employees. Instacart only sold a small percentage of outstanding shares in the offering. The company had to adjust its valuation multiple times during last year’s market downturn and shift its focus to profitability. Simo stated that they were not looking for the perfect market window but rather wanted to ensure that employees could benefit from their hard work.

Klaviyo, on the other hand, did not feel pressured to go public. The company had positive momentum and saw it as a great opportunity to expand in the enterprise sector. Klaviyo’s revenue increased by 51% in the latest quarter, and it turned profitable. CEO Andrew Bialecki emphasized the importance of profitability for companies to have control over their destiny.

### The Changing IPO Landscape
#### The IPO market has shifted from prioritizing future sales to profitability.

During the IPO boom of 2020 and 2021, valuations were based on future sales rather than potential earnings. Tech companies were focused on aggressive growth and were willing to burn cash to expand their customer base. However, the recent IPOs indicate a shift towards prioritizing profitability and sustainability. Companies like Instacart had to lower their valuations to align with market expectations, while Klaviyo grew into its valuation by increasing revenue and becoming profitable.

### The Challenges of Going Public
#### Going public comes with potential challenges for founders and management teams.

While going public provides liquidity and an opportunity for growth, it also comes with challenges. Public companies face the volatility of stock prices and the need to provide regular updates to investors. Given the lukewarm reception of recent tech IPOs, founders and management teams may question the rewards of going public.

However, Aswarth Damodaran, a professor at New York University’s Stern School of Business, believes that the recent IPOs are performing reasonably well given the skepticism in the market. If the stock prices remain above the offer price in the coming weeks, these companies can consider it a win.

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