Tech IPOs in 2023: A Year of Reckoning or a Year of Opportunity?

From Venture Capital Funding to the IPO Market – Why It’s Different in 2023

Once a company has raised significant capital, it’s often an inflection point to decide whether to scale operations, expand the team, move offices, update product offerings or even opt for an initial public offering (IPO).

An IPO is when a privately owned company lists its shares on a public stock exchange, like the New York Stock Exchange (NYSE) or the Nasdaq. It’s a natural progression that can surprise directors and officers, making them reevaluate leadership and search for more insurance and protection to de-risk their journey.

Being able to expand into new markets and invest in infrastructure, technology and personnel for sustained growth sounds all well and good. However, there are a few drawbacks for private companies planning an IPO, too: public scrutiny, paperwork, and financial disclosures to meet the Securities and Exchange Commission (SEC) requirements.

Success hinges on preparedness and making strategic moves at the right moments. The likes of Airbnb and Bumble chose IPOs during the pandemic to let employees and investors cash out, compete with rival companies, and attract top-tier talent.

However, now we’re dealing with a different scenario. Following several successful years marked by historically low interest rates and tech advancements reshaping the economy, the tech IPO market collapsed in 2022.

According to Ernst & Young’s Global IPO Trends report from December 2022, IPO deal proceeds plummeted 94%. With an economic downturn and sustained higher interest rates, things weren’t looking up for 2023 either.

But now we are well into the year, we’re witnessing early indications that we have perhaps seen the worst of the downturn in private-market investing. Here’s the juicy scoop on what’s been happening.

New Public Companies Making Waves in 2023

Some tech startups have been testing the IPO market again in 2023, pushing up valuations. So, here are some of the most notable tech IPOs, including factors that contributed to their success.

1. Nextracker Inc. (NXT)

Nextracker, a leading global provider of solar tracker and software solutions, started trading its shares in February this year, with its latest market cap being $5.156 billion. During its US market debut, the shares soared by 26%, suggesting that the tech IPO market was beginning to surface from a prolonged freeze.

By the end of Q1 2023, 29 of the 943 hedge funds (tracked by Insider Monkey) had invested in Nextracker. And many analysts covering the stock between Q2 and Q3 had rated the shares as Buy.

One of the reasons for the company’s successful IPO could be because they chose Barclays as one of their key partners and Joint Active Bookrunner. They shared the same view that Nextracker could become one of the world’s leading clean energy solutions companies. Barclays also had a previous banking connection with Flex (who acquired Nextracker in 2015), meaning they were well-positioned to accompany Nextracker on its path to growth.

2. Arm Ltd. (ARM)

British chip designer Arm filed for an IPO with the SEC in late August 2023 and is now trading on the Nasdaq Global Select Market. Arm jumped nearly 25% during its first day of trading after selling shares at $51 a piece. Given the rise in chip stock prices in 2023, Arm’s prospects always looked promising.

Its chip technology is used in many global smartphones, including Apple iPhones and many Android phones. Unsurprisingly, Apple, Nvidia Corp and Intel Corp were reportedly among the tech giants wanting to buy Arm IPO shares.

3. VinFast Auto Ltd. (VFS)

Vietnamese electric vehicle maker VinFast began trading on the Nasdaq following a SPAC deal with Black Spade. The deal valued VinFast at approximately $23 billion, and the company can now move forward with projects like diversifying its supply chain to get ahead of competition like Tesla.

VinFast’s US shares opened at $22 and rose to $37.06. This meant that on the first day of trading, its market cap actually surpassed those of some of the long-established companies like Ford Motor. And VinFast now has the third-highest market cap among global carmakers.

Tech Companies That Delayed Their IPOs in 2023

Those are just a handful of success stories, but some notable tech companies delayed their IPOs in 2023, including Reddit and Stripe.

VNG, a Vietnamese technology firm, delayed its $150 million US IPO due to volatile market conditions. Its regulatory filings for a Nasdaq listing became public in late August, and its debut was set to occur in September or October. Their upcoming IPO is now likely to happen in the first half of 2024.

The Databricks IPO has been highly anticipated for the last couple of years, too. Databricks, an American enterprise software company founded by the creators of Apache Spark, is certainly observing how the market embraces new IPOs. But it isn’t making any immediate moves until the markets are over the hump regarding inflation and interest rates. There’s no official date for the listing, but it was rumored that it would take place in the latter half of 2023.

It’s also now in a better place as, backed by chipmaker Nvidia Corp, the company raised over $500 million in venture capital funding, bringing its valuation to $43 billion.

And lastly, Chime, an online bank catering to young, budget-minded consumers, had planned to become a public company last year at a valuation of around $25 billion. However, due to unfavorable market conditions, the company delayed its IPO. On the other hand, fintech stocks seem to be bouncing back this year, meaning that Chime’s debut may be on the cards soon. Its competitors include app-based bank SoFi Technologies, which has a market cap of $7.09 billion.

Case Study: Instacart Finally Becomes a Public Company

Grocery delivery app Instacart may have been letting staff go, slowing down recruitment and cutting other expenses as it headed toward a public listing, but at least it made it. Instacart has been the talk of the town as going public on Nasdaq could unfreeze the tech IPO market, where there hadn’t been any notable venture-backed tech IPO in the US since December 2021.

Instacart is an online grocery delivery and pickup service that connects users with local stores and supermarkets, where a network of personal shoppers are at the ready. According to its website, Instacart shoppers and drivers deliver goods in over 5,500 cities from over 40,000 stores. Amazon, Target, Walmart and DoorDash are among its competitors.

Investing in AI and machine learning — to predict grocery availability for retailers and increase consumer sales — helped with the rollout of the IPO. Instacart’s move into AI resulted from various acquisitions: the purchase of e-commerce platform Rosie, AI-powered pricing firm Eversight, smart cart and instant checkout startup Caper, and FoodStorm, a SaaS order management system (OMS).

Also, in 2020, Instacart hired Goldman Sachs to assist in laying the groundwork for its stock market debut. By 2021, the company had welcomed executives from Facebook and Goldman Sachs to join its leadership team. For example, Fidji Simo, Instacart’s CEO since August 2021, was previously head of Facebook’s app at Meta and reported to Mark Zuckerberg.

In March 2022, Instacart slashed its valuation to $24 billion from $40 billion. But by May 2022, it had submitted a draft registration statement with the SEC to go public, which meant not having to disclose certain data about the company immediately.

And in the first six months of 2023, it was another story: Despite a history of losses, Instacart brought in $1.5 billion of revenue and $242 million in net income. Nonetheless, ahead of its IPO, it cut its valuation again by several billion dollars for a stock price between $26 and $28 per share. Yet, after seeing Arm’s successful market debut, Instacart raised its valuation target. The price range per share was between $28 to $30.

Trading under the ticker symbol “CART,” the company was aiming to raise up to $650 million by offering 22 million shares. Many investors agreed to buy up $400 million worth of shares, and on September 19, Instacart finally sold its tech stocks at $30 a piece.

On the company’s second day on the Nasdaq, Instacart’s IPO hype was already fizzling out, with shares slumping nearly 11%. The stock price closed at $30.10 — narrowly above its IPO price and below its first-day highs.

The Future of Tech IPOs in 2023 and Beyond

Instacart and Klaviyo’s falling share prices and lower valuations could suggest that investors are still hesitant to back tech companies coming to public markets. It’s clear we’re still not out of the woods quite yet.

Numerous global equity market challenges have contributed to this challenging environment: stubborn inflation, rising interest rates, the Russia–Ukraine conflict, the European energy crisis, supply chain disruptions, and concerns about a global recession.

The standstill in the IPO market since 2021 put a real damper on valuations, with declining stock prices even affecting the likes of Apple, Microsoft and Amazon.

So, what can drive future IPO activity for the technology sector?

First off, companies and investors must gain confidence that market volatility is returning to normal. Then, any interest rate decisions made by the US Federal Reserve System and other central banks will also have an impact, especially on future cash flows of companies, valuation rebound, and investor sentiment.

The ideal situation would be that multiple companies in the same industry decide to go public. This spurs competition, and such an environment could encourage companies to accelerate upcoming IPO timelines to gain an edge and secure public funding.

Having said this, at Founder Shield, we believe the IPO landscape will gradually return to what we consider “normal,” with a steady stream of companies going public. Although there’s been an IPO lull, activity is bound to pick back up — but it won’t be quick. It’ll be more like a snowball rolling down a hill, gathering pace. This slow return won’t thrill many players, but it’s likely the reality of the IPO future.

For that reason, late-stage companies can start preparing for their exit now, making sure all their insurance is in order. Today’s adverse capital market conditions are an excellent time to lay the groundwork for an IPO, especially when preparation takes 12 to 18 months. Starting the process now will mean companies are ready when favorable market conditions return.

If you have no clue where you stand in terms of insurance, Founder Shield can assess your risk profile and provide direction on the insurance you need.

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