??So…were the recent IPOs a success or not?
John Morrison, CFA here, Secfi’s Head of Portfolio Management. First, we just hit the one year anniversary of Secfi Wealth, and I couldn’t have said it better than Chris already has. Thank you to all of you that have contributed to this milestone and for continuing to support us, even if it just means reading this newsletter!?
Now, onto today’s topic: Were Instacart and Klaviyo’s IPOs successful? The window has finally cracked open…but will it stay open? Will it open even wider?? As I’ve said plenty before, I can’t predict the future! But I invited Vieje to have a conversation about our thoughts on these IPOs and what it may mean heading into the end of 2023.?
I will start by saying, after nearly two years of the biggest IPO drought in recent history, any sign of life is a positive! But, surely, most of you — especially if you’re at a late-stage company waiting in the wings for an IPO — are curious how this could impact your ability to finally get liquidity for your equity.
I invited Vieje Piauwasdy to talk about our takeaways from the past couple of weeks, answering some (likely) burning questions many of you have.
Why did Klaviyo and Instacart decide to be the first to break open the IPO Window??
John: Because they could. Why could they? Because they have solid businesses with good growth prospects and current profitability. The days of going public without a clear path to profits are over, at least for now. Now that I’ve said that, of course some pre-revenue speculative companies will probably IPO. Look, companies go public for some mix of three reasons: to raise capital for expansion, to provide liquidity for early investors and employees, and/or for publicity. Klaviyo in particular doesn’t need capital for expansion, they still have a bunch of cash from VCs on their balance sheet that they didn’t even use because they have created a profitable company. The IPO therefore, is more about passing the baton to a different set of investors, providing liquidity for the initial investors and employees.
Vieje: Right. Sentiment has shifted from growth-at-all-costs in 2021, when interest rates were nearly 0% to businesses that are both growing and have a path to profitability, if they aren’t already there. Both of these companies had those characteristics.?
John: I’d also point out that both had profitable quarters before they went public.?
Vieje: That’s true. They both also had to make some hard decisions to achieve the characteristics investors wanted, like cutting costs to get to profitability and cutting down their valuation from 2021 highs. Those were surely hard pills to swallow, but it was what was needed to get here.
What did they hope to get out of an IPO? What was the end goal?
Vieje: One major benefit of being a public company over private: it’s (historically) a lot easier to raise money. You don’t have to do the VC dance, which is even harder to do right now. Shares are freely traded and information is all out there so raising money is easier. Instacart’s CEO also announced that a major reason was for employees. Instacart has been private for a very long time. Employees haven’t had a liquidity event for a long time, and they want it. Employees from way back 2010’s couldn’t cash out, and there’s likely pressure that was building. Plus there’s a 10-year exercise window for many of them that’s near to expiring.?
John: Right. With some of these older companies, like Instacart, providing their employees and early investors with liquidity is likely going to be a major reason in the near term. Instacart did confirm that they were only selling existing shares. Their press release clearly stated: “Instacart will not receive any proceeds from any sale of shares by the selling stockholders.” So, right now, it wasn’t about raising money. But, as you noted, Vieje, if they want to in the future, it should be easier.
So far, should their IPOs be viewed as a success??
John: Yes! The fact that they even got to this point is a success. The percentage of VC-backed startups that even reach the public markets is very small. Anyone involved with either of these companies should be proud that they helped build a business successful enough to go public.
Vieje: Exactly. Not a lot of companies get to an IPO. The fact that they could ring the bell is a huge accomplishment on its own. I’d imagine it’s a fraction of a percent of all startups, and even among unicorns it’s a rarity. You have to call it a success. And employees at these companies should be ecstatic that they can say they helped build a company public.?
John: But, also what do we mean by “success”? It has to be defined. On the one hand, they both succeeded in selling shares to willing buyers. A transaction has happened. But I know people are curious from a financial perspective, as in the price of their shares, did it succeed? Here are the facts. As of the end of the day on September 28, Instacart is down 0.3% from their IPO price, which is ahead of the S&P 500 price, during the same time, by 3%. Basically flat, but outperforming the market. Klaviyo is up 21% from their IPO price, and over the S&P 500 by 25%.?
Vieje: Klaviyo is definitely a success, in that sense. But even Instacart should be viewed as a success on that front. Again, their main goal was to give employees, and early investors, access to liquidity. And their share price has maintained since the IPO.
John: Right. Again, they’ve succeeded in selling on the markets. If your definition of success is if they outperformed the market since IPO? Then also, yes, they’ve succeeded.
Vieje: From a valuation standpoint, yes they did go public for less than their 2021 valuations. I know that some employees may feel like a window was missed in 2021. But they should still feel grateful. Their shares are now publicly traded. It’s a win.
John: There are not many stocks that are above their 2021 stock prices. It’s all relative.
Vieje: Are there any?
John: I’m sure there are some, but it’s certainly a minority of companies.
How do you think they’ll perform in the long run?
John:? The stock performance will depend on how their future business executes compared to? the embedded expectations. If I really knew how they’d do, I’d be a very rich person chilling on a beach!?
There’s a certain expectation already embedded in the share price of both companies. Their business results may be better or worse than what’s already baked in the share price. If they exceed expectations, their share prices will go up. If they disappoint, they will go down. Two things make it hard to predict: It’s nearly impossible to know what’s embedded in the price and it’s very difficult to predict what will happen in the world in the future.? What I can say is that ALL companies tend to underperform the market overall because stock returns have a long positive tail. That means, any company, even these, is more likely than not to underperform.?
Vieje: Again, that’s why it’s important to have a plan. There is always a lot of uncertainty about stock prices, don’t stake your future on the price of a single stock. If you're an employee whose shares are locked up at one of these companies, make sure you have a plan for when that lockup ends. There’s emotion involved and it’s easy to sell it all or not sell any. It’s important to have a plan that takes out the emotion. Just selling stocks you own is hard!
How should employees feel these companies feel right now?
Vieje: As someone that’s never been through an exit, it’s hard to say how they should feel. As an outsider, I think you should always feel excited that you exited. You’re a member of an exclusive club. All that said, I have spoken to many employees at these, and other near-IPO, companies that feel like they missed a window back in 2021 or before. But, I think 2021 also set up unrealistic expectations.
John: I totally agree. It’s easy to look back and say “what could’ve been.” But the thing is, the environment now is normal. 2021 was an anomaly, historically. So I agree that employees should be feeling good. The stocks have outperformed the market and they have the chance to finally liquidate their equity.
Vieje: Plus, it’s a pretty cool thing to put on your resume, especially if you were an early employee. You helped bring a company public!?
What do you think will be the impact on IPOs going forward?
John: I think it’s a positive signal. The fact that investors have demand for new issues is a step in the right direction for, potentially, more IPOs. But markets are fickle, so we can’t declare victory yet. And I don’t think it’s going to create a bonanza of IPOs like we saw in 2021. But there is demand from investors, as long as those companies have the characteristics they’re looking for. Mainly, profitability, or a strong path towards it, plus solid growth.
Vieje:? The reality is that there’s a huge backlog of companies waiting to go public. We’ve said that in this newsletter before. And more names are getting added to that list. It’s been closed for 2 years, a lot of companies have been waiting. Klaviyo and Instacart cracked it open and more companies are now starting to look at Q4 and beyond. A lot of companies are going to take advantage, if they have the same profile, as you mentioned John. But there are some companies that don’t fit that profitability profile. So, some may hold off longer until they can get that profile or until investor sentiment starts looking more toward growth again. There will probably be a handful more over the next few months, but probably not the explosion some predicted.?
John: Right. I think they performed, at the very least, well enough that other companies who have similar profitability profiles will feel more comfortable. But, again, markets are fickle, and these IPOs aren’t the only data points to dictate if, and when, other companies should go public.
Vieje: Yes, the profile has changed from 2021 when it was all about growth and not necessarily about profitability. It’s why we’ve seen a lot of companies focusing very hard on profitability the last year or so. It’s the name of the game, growth potential alone doesn’t cut it right now.
John: Again, 2021 was an anomaly. Typically, investors always look for profitability. Any equity investor, that’s what they have a claim to — the net profits. If a company is never going to be profitable, their equity is worth zero. Whether people in 2021 genuinely thought some of the speculative companies were going to achieve profitability, or they just forgot that equity investors receive profits, I’m not sure. But these IPOs — Klaviyo and Instacart — illustrate the norm, not the exception. 2021 was the exception.
What should be the key takeaways for all startup employees after these IPOs?
John: You cannot control the market. Focus on what you can control in your sphere of influence. If your company is one that might go public, start planning now. There are lots of things you can do ahead of the IPO to improve your net wealth after the lockup expires.
Vieje: In bull markets, everyone gets too aggressive. In bear markets, people aren’t aggressive enough. As you said, you want to create a plan because you can’t control the markets. Stocks don’t always go up! Employees saw that over the last couple of years with valuations dropping. But it’s also just human nature to feel that way. It just shows the importance of having a plan, and to not feel overly optimistic or pessimistic.
John: Save as a pessimist, invest like an optimist. I think that’s a piece of advice that can get you far. Don’t rely on your company to go public for your retirement plan, but set yourself up so that if they do go public, you can benefit.
Vieje: I think you said my point way better! But, overall, employees, especially those at late-stage, pre-IPOs should feel good. IPOs are happening again, and that’s a good thing
How should employees at early-stage companies be feeling?
John: Going public is very hard and therefore very rare. Hope for the best, but plan for the worst. If your retirement strategy is to bank on the success of your employer’s stock…Oh boy, good luck, you’ll need it. But, seriously, you shouldn’t join an early stage company expecting it to go public. It’s just not a rational expectation because most companies don’t. Of course, you should still work very hard to make it a reality. But we all know that life is a mix of luck and things out of our control too. Join an early stage company because you want to build it, and then build it. And come what may.
Vieje: Part of it is that joining a company solely to get rich off equity is the wrong reason to do it. The unfortunate reality is that it is a bit like a lottery, it’s partially luck. And pretty much everyone won’t be like the Facebook graffiti artist that made hundreds of millions. All that said, you do want to join a startup that has the capacity to grow. And you should focus on that growth, and not just the payout. If you are looking at equity value, joining a company that has already raised a ton of money at a high valuation, the growth potential may not be as high as a company earlier in its journey. John: Yes, the earlier you join the more likely you are to make from your equity. If they exit, of course.
Overall, what are your biggest takeaways from the IPOs so far?
John: The IPO market isn’t dead. It’s not thriving yet, but there are signs of life. In these weird times, I believe it to be the duty of intelligent people to state the obvious. So in that spirit, investors invest to make money, if your company doesn’t, why would anyone buy the stock in an IPO??
Vieje: I’m now cautiously optimistic. We had two IPOs that went relatively to very well, based on our definition of success. And there will be more coming, whether that’s in Q4 or early 2024. I’ve been speaking to a lot of investors and executives and all signs point to more companies planning for a market debut in the coming months. as long as the market holds up. For employees at companies in that backlog, now is the time to start planning for it. That doesn’t mean going out and buying a vacation house, but it means you should start seriously thinking and planning for it. Market sentiment could go down but right now we’re seeing signs of life for the first time in nearly two years.?
What should people take away from the media narratives about the IPOs?
John: Remember that the business of media companies is based on engagement. Which leads to articles with wildly negative or positive tones. Usually, the truth is somewhere in the boring middle with a lot more nuance than is communicated. Don’t let the permabears or the permabulls get to you and cause you anxiety. Yes, the market could crash. That’s always a possibility. Yesterday’s return or last week’s return contains no useful information about the likelihood of market returns going forward.
Vieje: One thing I immediately noticed, back in 2021 there were articles about a ton of minted millionaires running around SF. But this time, the narratives are much more muted. The reality is we have a lot more minted millionaires in SF (and Boston, for you Klaviyo employees). So, I’m stoked for you if you’re at Instacart and Klaviyo. You may not be getting the same media attention companies in 2021 did, but be proud.?
John: Things are almost never as good as the media portrays, nor is it as bad. It’s about extremes. My advice, try to tune it out when making decisions.?
Veije: Yup, and I’ll say it again: Make a plan! It helps to have something you can stick to in good times, and bad. And to help remove emotion from decisions, as best you can.
Things we’re digging:
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