In July, we expressed cautious optimism that the IPO market would open up in 2H 2023. We love to cite ourselves. Makes us feel smart. And it looks like it’s happening:
- ARM went public in a $54 billion IPO last week and popped 25% on the first day of trading. It’s the biggest IPO since 2021. And it was 6x oversubscribed. (Let’s ignore the fact that the valuation makes no sense. Their stratospheric 170 P/E multiple is more than 50% higher than tech darling Nvidia’s 109 multiple; and Nvidia’s quarterly revenue just doubled YoY while Arm’s revenue was flat YoY.)
- Instacart is killing it. They swung from a net loss to a $242 million profit in 1H 2023, and grew revenue 31% to $1.5 billion. They just went public at the top end of their $10 billion target valuation.
- Klayvio? Killing it. ARR is up 54% YoY to $580mm. BlackRock and AllianceBernstein are taking $100mm positions in an IPO that’s 20x oversubscribed.
- Reddit and Stripe both filed S-1s in 2021; they may be next.
Amazing news for investors. Right?
Well….
- Instacart is going out at a $10 billion valuation. Its 2021 valuation? $39 billion. General Catalyst, DST Global and T. Rowe Price each stroked $50 million checks in private rounds. At the IPO price, each will lose 35% or more. Sequoia will lose 75% on the $50 million it invested in 2021. (Don’t shed a tear for Sequoia; they’ll make $1 billion on the $8 million they invested in 2013 back when valuations were, you know, sane.)
- Reddit filed in 2022. Great? Not for Fidelity. Fidelity invested in 2021 and less than 2 years later, reduced their mark by 41%.
- Stripe raised money in 2021 at $95 billion. Then, they cut it to $74 billion. Then they cut it to $63 billion. Then they cut it to $50 billion.
- Klayvio’s target valuation of $8 billion? It’s below the $9.5 billion post-money on their 2021 round. Maybe flat is the new up.
These are the very strongest private companies in scale, growth and profitability. Yet many are pricing their IPOs at heavy discounts to their last private rounds.
What does that say about the private companies that are merely good, not great?
What does that say about the private companies that aren’t even good?
We believe it says that VC marks remain significantly overstated.
Broad information on historical VC marks is notoriously hard to come by. That’s why IPO valuations on the strongest private companies are a valuable data point.
Another? Heavy markdowns by the largest and most prominent VC investors. Softbank lost $48 billion in the Vision Fund alone. Tiger Global has already marked down valuations by 30%; but valuations of public companies in the same sectors Tiger invested in, were down 50% or more during that period. This suggests their 30% haircut was too small – a view buttressed by the broken process on Tiger’s efforts to pursue a secondary sale after the markdown.
This suggests that many “good not great” portfolios are likely to see discounts in the VC secondary market of at least 50% to 60%.
And we believe many CVCs, insurance companies and family offices have not faced the music on what their positions are actually worth. Their markdowns have often been closer to 30% than 50% or 60%.
They’ve benefited from latency in the system. Investees have stretched their cash on hand, which has delayed the market re-set. But eventually they need to raise capital. And there’s no choice but to re-set the mark.
There’s no question that the revival of the IPO market is a very good thing for VC. It should begin to open up a historically tight funding environment.
But when even the strongest performers go public at a heavy discount to their last private round – and when many private investors have been slow to fully face up to what their investments are worth today – it suggests more pain for VC investors to come.
So let’s all hold off on the champagne. (Unless you have a really good reason for it.)
