The current IPO slump has parallels to the one that followed the dot-com bust.
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Arm is looking to land a $52 billion valuation as it plans its IPO this month, while Instacart is also planning a multi-billion dollar debut.
IPO and startup experts, however, don’t anticipate the splashy launches to revive the muted market.
One Wharton academic compared the current landscape to the years following the bursting fo the dot-com bubble.
There’s plenty of attention on both Arm and Instacart’s impending initial public offerings, but it’s wishful thinking to expect the debuts to revive a market that’s still feeling a hangover from the pandemic boom.
The two have widely-known brands, and all told will command relatively hefty valuations compared to the typical company looking to go public.
Softbank-owned Arm, for one, is looking to raise up to $4.87 billion and could land a valuation as high as $52 billion, according to its Tuesday regulatory filing.
The company, which designs the chips used in most of the world’s cell phones, is set to complete the biggest IPO of the year, and it’s amassed a wave of big-name interest from Samsung, Google, Apple, and Nvidia, among other investors.
Online grocery delivery startup Instacart, meanwhile, is set to announce its pricing range as soon as Monday, Bloomberg reported, and its shares could start changing hands by mid-September.
In 2021, Instacart was valued at $39 billion, when pandemic lockdowns juiced up demand for delivery services. Now, Bloomberg Intelligence estimates put it closer to $12 billion, but even that is more than double the loftier typical IPO valuations.
Startup and financial experts don’t believe either name makes for an accurate gauge of the broader market, which is widely still in a slump.
“I don’t think this is something where the floodgates open all of a sudden after Arm and Instacart,” Brianne Lynch, head of market insight at EquityZen, a platform that offers investors shares of pre-IPO companies. “We’re really looking at the worst market for IPOs since 2009.”
In 1999 and 2000, a record number of companies went public even though they weren’t turning a profit. Most of them — especially those with names ending in “.com” — didn’t make it, as sky-high promises of growth gave way to a bleak reality.
David Erickson, a senior fellow in Wharton’s finance department, told Insider the current landscape reminds him of the IPO landscape that followed the dot-com bust.
The majority of companies that went public during the pandemic now trade below their IPO prices, and that’s what happened two decades ago for the ones that remained afloat.
“What we had in 2020 and 2021 was very emblematic of what we saw back then,” Erickson said. “There was so much excitement around growth companies, and the market got carried away. After 2000, it took years before IPOs came back, and now we’re kind of at that period too.”
Put another way, Arm and Instacart aren’t “most companies,” and their public market debuts are outliers relative to other firms mulling an IPO.
Hesitant investors and VCs
During the pandemic, many venture capital-backed companies were able to secure huge valuations with little to show for it — borrowing was cheap, markets were hot, and liquidity was abundant.
The Fed’s historically aggressive interest rate hikes have put an end to all that.
Today’s startups have to come to terms with a higher-rate environment. That means investors won’t be as willing to buy into a meteoric growth pitch from founders who haven’t strung together steady profits, according to Jackie Berardo, a tech startup consultant and researcher at Meta.
“Coming to market now means taking an inevitable cut in valuation,” she told Insider. “But it’s not just IPOs that have been closed for awhile, acquisitions for startups have also slowed. There’s so limited exit opportunities right now, and it doesn’t make sense for investors to park their capital in high-risk assets like an IPO.”
Arm and Instacart aside, investors must now grasp that many companies won’t be able to live up to previously-secured valuations, even years down the line.
The lack of venture fundraising, EquityZen’s Lynch added, means startups have to decide whether to raise capital at a discount in the private market, or make the risky attempt to go public.
“In addition, there’s a lot of pressure for late-stage companies to exit from their VC backers,” Lynch said. “Those VCs rely on those companies to exit, so they can return capital to their limited partners, so they can in turn invest in new companies. When there’s no exits, that whole cycle is broken.”
No rebound in sight
Besides Cava, there have been few success stories across the IPO market over the last year, and that looks unlikely to change regardless of how Arm and Instacart perform.
To Erickson, there are two dynamics at play that will determine whether the market can reopen.
First, investors and VC firms need to get excited again about backing IPOs that may not yield the same returns or even share similar growth outlooks as prior years.
And second, founders have to make peace selling their company at lower valuations. That entails coming to terms with higher interest rates, and a more difficult business landscape.
“Are there some standout companies that could come? Probably,” Erickson said. “But no one wants to be first. Especially those that look like the ones that went public in 2020 and 2021, those that are growing fast, and not breaking even for years. I don’t think Arm or Instacart will be the catalyst here.”