Tech IPOs Could Burn Firms That Invested Too Late in Hot Startups

Oct 9
Instacart, Arm Holdings Plc., and Klaviyo Inc.'s three initial public offerings (IPOs) at the end of September signaled the end of the 32-year-long dry spell for IPOs. As the market continues to recover from significant losses in 2022, many experts now anticipate that more companies will enter the public markets this year and even more in 2024. Investors will be particularly interested in the long-awaited launch of giants like Stripe Inc., one of the biggest startups in the world.
A significant IPO is the typical goal for venture capitalists. Deals will become extremely beneficial for investors who placed early bets on startups that evolved into billion-dollar companies as market debuts become more frequent once more.
 
However, startups with erratic values, like Stripe, Klarna Bank AB, and Ramp, may disappoint some important supporters by going public on the private market. The most vulnerable companies are those that placed bets on mature businesses whose values have increased as a result of the recent startup boom.

Mutual funds, hedge funds, and sovereign wealth funds are a few non-traditional investors in companies. When it comes to early- and late-stage investing, adds Index Ventures partner Nina Achadjian, "the two skills came to be seen as interchangeable during the COVID-era investment frenzy, when markets seemed to be unlimited."
She believes that enterprises will have to return to specializing in businesses at particular phases of development as a result of declining valuations.

Late-stage investors were so eager to close deals that they frequently abandoned established safeguards, like demands that businesses make up the difference if their IPO valuations are lower than those in the most recent round of private financing.
As the IPO market slowly opens up, each of these factors will start to matter. Like Instacart, the worth of Stripe has decreased over time. In 2021, when the firm was valued at $95 billion, according to PitchBook, investors such as Coatue, Fidelity, Silver Lake, and the Irish Treasury's Irish Strategic Investment Fund made their initial investments.
 Payment services provider Klarna is another significant startup anticipated to list on a stock exchange as demand for financial listings increases.

New investors in 2020's investment round valued Klarna at roughly $10 billion, including Singapore's GIC, Silver Lake, and TCV. The company raised $1 billion the following March with a valuation of $31 billion; in a round-headed by SoftBank in June, it received another $639 million at a valuation of $45.6 billion.

However, in the investment round last year, its valuation sank to about $6.7 billion, indicating those investors would suffer significant losses if the business went public at that price.

The reduction in late-stage financing and what it means for the level of competition in the startup investing market will probably be cause for celebration among some early-stage venture capital companies.

Old-school venture capitalists have been concerned for years that non-traditional investors would swarm to Silicon Valley, inflating company valuations and driving out venture capitalists from their customary grounds.

However, even many seasoned investors in venture capital suffer losses. Amid the pandemic, promised earnings and protracted IPO delays have led numerous companies, including Sequoia, to launch independent later-stage offers. In a perfect world, businesses that achieve hundreds of millions of dollars in revenue and can show sustainable development would either go public or find a buyer. This would do away with the challenges of managing numerous businesses, each with its demands, as well as the fear of missing out, which drives up costs in the private market.

 Even if low listing prices make businesses more cautious, it's not certain that behaviors will stay the same. Aswath Damodaran, a professor at New York University's Stern School of Business, claims that all it takes is one more boom for amnesia to set in and mistakes to be repeated. "To be honest, I'm not certain it's a negative thing. The financial market must have this component.

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