Instacart, Databricks, Arm Could Lead the IPO Market Out of Its Freeze

British chip designer Arm, which SoftBank Corp. plans to spin out after failing to sell it to Nvidia for $40 billion earlier this year, intends to list next year, the firm has said.

“Ultimately, these companies do need to get liquidity. They can’t say, ‘We can hang out here forever,’” said Andrew Boyd, who led investments in pre-IPO companies at the mutual fund giant Fidelity Investments. Boyd, who now runs his own venture capital firm, Bramalea Partners, wasn’t speaking about specific firms. “If you’re ready to go, just go. The stock will eventually get to where it is.”

Tech firms almost unanimously decided not to test the markets this year, as the Federal Reserve’s interest rate hikes—designed to tamp down sky-high inflation—dramatically changed investors’ calculus on valuing tech stocks. Overall, it was the slowest year for funding raised through public listings in at least three decades, according to Renaissance Capital. Only 14 VC-backed firms have done IPOs this year, the lowest number since 2009. VC-backed firms that went public in 2021 saw their stocks fall 55% on average this year, Renaissance Capital found.

“We’re already at the trough historically, and I don’t think the market will stay completely closed another full year,” said Alex Wellins, co-founder and managing partner at The Blueshirt Group, an investor relations firm that works on tech IPOs.

Instacart may be first out of the gate among high-profile firms. It had planned to go public for much of this year, even while stock markets were volatile, before it iced those plans in the fourth quarter. Executives have said it intends to list soon. Through the first half of the year, it was on pace for more than $2 billion in 2022 revenue and generated about $30 million in earnings before interest, taxes, depreciation and amortization in the second quarter, a person familiar with the matter said. Instacart has turned a profit on that basis between 2020 and 2022, the person said.

Those numbers would make it slightly smaller but more profitable than delivery rival DoorDash was when it went public at the end of 2020 amid a boom for tech stocks. The Wall Street Journal previously reported that Instacart turned a net profit in the second quarter. New CEO Fidji Simo, a former Facebook executive, has said the company would amass a growing portion of revenue from more-profitable business lines like advertising and analytics tools it sells to food brands and grocery chains.

“We do not need a perfect market; we’re just looking for an open market window,” Simo told Instacart employees in October.

Executives at Databricks, which sells cloud services and software for companies to manage large data sets, have recently told investors the firm intends to go public by summer 2023, according to people familiar with the matter, although that timing could shift based on market conditions. The company last raised venture capital at a $38 billion valuation in August 2021.

The firm appears confident about its valuation holding up fairly well: It recently trimmed its internal valuation by 7%, during a period when other highly valued private tech firms have been slashing theirs in line with the broader decline in tech stocks. The firm isn’t profitable, a person familiar with the matter said.

In August, Databricks reported $1 billion of annualized recurring revenue, roughly half that of its publicly traded peer Snowflake. Analysts estimate that Snowflake, which also isn’t profitable, would generate about $2 billion in total revenue this fiscal year. Snowflake’s stock, which soared after its 2020 IPO, has fallen by about half since last fall.

"Our long-term plan is to operate a public company that’s going to be very successful in its own right over many years. At this point, we don't have a date to share,” said Jenna Kozel King, a Databricks spokesperson.

Smaller, decade-old enterprise software firms including AppsFlyer and Redis are also candidates to list if market conditions improve, people familiar with the matter said.

The Cybersecurity sector could also be ripe for listings. Rubrik, a data security software firm founded in 2013 that was valued at more than $3 billion last year, is a candidate to list. Two larger firms, Snyk and Arctic Wolf, raised new outside funding in recent weeks that would help them stay private longer, though they may still decide to go public.

Business travel firm TripActions and software firm Gong are also expected to go public toward the second half of the year, according to bankers, lawyers and investors.

For many companies that have been preparing for IPOs, timing is still an open question. Investment bankers think a small slate of companies may release their public registration statements—filings known as S-1s—before mid-February. After that, companies can’t use third-quarter financial statements as their most recent numbers, but instead have to use year-end financials that take longer to organize. That means companies that don’t go public in the first two months of the year would likely wait until after Memorial Day. Many investors think there is little likelihood of economic and stock-market volatility clearing up until the second half of the year, and many are bracing for a recession.

Bankers, lawyers and investors say most firms that filed to go public confidentially last year have continued to update their financials with the Securities and Exchange Commission to stay on track. A small portion has pulled plans completely.

Firms that consider listing next year may have to do so-called down-round IPOs, in which they sell shares in the public listing at a price below their last private valuations.

An analysis by The Information shows that potential tech IPO candidates would see significant declines from their most recent funding rounds if they were to go public today, based on how comparable publicly traded firms have traded since that date.

Declines in social media and e-commerce stocks imply that Reddit and StockX valuations would be down about three-quarters from their last private rounds. Instacart, which has lowered its internal valuation three times this year, would be off about 65%. (That is in line with how Instacart slashed its own internal valuation in October, The Information previously reported.)

The valuation pressure likely cools any prospect of an IPO frenzy. Some investors think the disconnect between companies’ previous valuations and how their public peers are valued will throw cold water on IPO plans entirely next year. “The discrepancy in valuation expectations will keep the 2023 IPO window closed for tech companies,” said Jeremy Abelson, founder and principal at Irving Investors, which invests in private and public tech firms.

If tech companies do decide to go public next year, they would likely follow in the footsteps of other brand-name firms that have gone public at a discount from their last VC round, including Block (then known as Square) in 2015 and Pinterest in 2019.

Aaron Zamost, who formerly ran the communications and human resources divisions at Square, said the payments firm traded below its previous private round because of the “misguided” perception that it would struggle to become profitable amid a broader market period in which investors thought tech stocks were overvalued.

“We knew perception of the business was wrong and that while the stock might suffer in the near term, it wouldn’t matter long term as investors figured it out,” said Zamost, whose firm, Background Partners, now consults with startups on IPOs and communications. “So the best thing for the business was to go public and get it over with.”

Boyd, the former Fidelity investor, said he is watching closely which major tech firm makes the leap first to the public markets. He recently challenged an investment banker friend to a dinner bet: Would any tech firm with a valuation above $10 billion actually go public in the first half of 2023?

Boyd thought this year’s IPO lull would drag into the second half of 2023. The banker was more optimistic about the next two quarters. “Valuation solves almost everything,” said Boyd. “If people come down in valuation expectations, you may get a financial buyer, strategic buyer or you can do an IPO.”