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3 Oct - Commercial Awareness - Technology

Topic: Hot Big Tech IPOs falls to room temperature

https://www.ft.com/content/665137ac-0c93-4b08-8ca0-7197d835e9cd?accessToken=zwAAAYt4KMNxkc9mUTesDJNLCNOMoHGX2DXpzQE.MEUCIHucX5zW11IUy7srOfuQYbgL3DwKQGDTVDCaYzKKy30VAiEAqNmplDqSUx5dTF-lrC8Ks9PD1LejcuZ_Cp8jkyWsMi0&segmentId=7d4bcc2e-e664-92ba-62e3-5590579f1902

https://www.cnbc.com/2023/09/20/instacart-loses-almost-all-its-ipo-gains-by-second-day-on-nasdaq.html

https://www.ft.com/content/2b8f723d-52b0-4ea5-9703-7c65e3c6bd35

On the second day of trading, Instacart fell more than 11% below their first day. The plunge extinguished the IPO gains.

The two biggest IPOs recently are Arm and Instacart, both in the technology sector, the former is a Cambridge-based semiconductor, listed on NASDAQ. The latter is an online grocery delivery platform, also listed on NASDAQ, closed with a gain of 12%. The third IPO is Klaviyo, marketing automation software, which raised 15% more than its IPO price.

Interest rate ends the short Spring of IPO

• The IPO market entered winter since 2021 due to inflationary pressure and rising interest rate.
• The falling share price suggests that investors are still hesitant to buy into tech companies.
• On the day of Klaviyo’s IPO, was also the day FED announced their plans to support another interest rate rise this year and fewer cuts than expected in 2024.
• Interest rate is painful for private start-ups as they are valued by their future cash flow.

VC are “forced” to list for less desirable reasons

• VC that planned to go IPO delayed their plans. Pitchbook estimated that almost 80 IPOs are in the backlog.
• If they do go out despite the risky landscape, it would not be the traditional reasons of raising growth capital or liquidity.

1. Employee tax liabilities associated with Restricted stock units (RSU)

• RSU are shares offered to employees that allow them to cash in when a company exit — acquired or goes public
• Stripe, Klaviyo, Instacart have offered RSU
• Stripe raised more than $6.5bn to cover employee tax liabilities that comes from RSU.
• Instacart is effectively using all of the $600mn proceeds from its IPO to settle costs RSU-related costs.
• Klaviyo used almost all of $60mn to settle the outstanding RSUs

1. The need for liquidity

• VC investment is more long-term than PE as their investment lifecycle is usually 10 years. The ROI on this cycle determines how much they can raise during their next funding. VC firms need start-ups to go IPO or sale in order to distribute returns to their investors