3 lessons from September’s 3 big IPOs

Arm, Instacart, Klaviyo—oh my! Investors had high hopes that the trio of recent big IPOs would be enough to crack the door open and let the flood of unicorns through to the public markets. But based on their early, and lackluster, performance, it looks like VCs—and their eager portfolio companies—could be waiting a bit longer.

Individual factors for the companies’ performances aside, the “markets have worsened since these deals launched,” which delivered a blow to post-IPO trading, said Matthew Kennedy, senior IPO strategist at Renaissance Capital, a provider of pre-IPO research and IPO ETFs. But “There was this excitement of, you know, are these going to be hot deals? And that can build on itself, but it can also go away quickly,” he told me.  

In my view, these three listings were a test—and the IPO market didn’t pass. As plenty of folks have pointed out, shares of the recent debuts—Arm last week, and Instacart and Klaviyo this week—have largely slumped from their initial price pops. Instacart is down nearly 10% since its first day, while Klaviyo initially soared in its Wednesday premier before cooling off in the afternoon. It’s now hovering around $33, a little above its IPO price. Arm, which went public last week, briefly slipped below its IPO price (of $51) on Thursday, before closing around $52, and is off almost 18% since its debut.

Some investors aren’t too concerned: “I don’t worry too much about, you know, what happens in the days or weeks after the IPO,” Venrock partner Brian Ascher told me. But he added that he doesn’t think the VCs in his circle are feeling celebratory about the recent spate of listings.

And to market watchers like Kennedy, the recent performance trend means that “the first half of 2024 is the new second half of 2023,” he says, referring to when more companies may now be looking to go public. 

I rounded out a few takeaways from the recent big IPOs—and what startups should keep in mind if they’re sharpening their pencils to write an S-1 anytime soon. 

Get ready for discounts

Venture capital investors are all chatting about discounts these days, predicting companies will be taking more down rounds and raising new funding at lower valuations than their previous rounds. That’s likely going to be true of would-be public companies, too.

Companies going public usually price shares at some discount to public peers, because they don’t have any trading history and are more risky, Kennedy notes (When times are booming, unlike now, there might not be much of a discount). “Klaviyo and Instacart…both had more of that typical IPO discount to peers,” he said. But they may have still been too ambitious with pricing. Instacart raised its range and priced at the top of that higher range, at $30 per share (the stock closed on Thursday at roughly that same level, a couple days after its debut); while Klaviyo also priced $1 above the top of its already-heightened price range of up to $29.

“We’re still arguably in a very challenging market for tech IPOs, as we see with these deals. I think that tells us we might need to see more than just a typical discount,” Renaissance Capital’s Kennedy argues. 

That means that those future IPOs in the pipeline need to be priced at a significant discount—even more than Arm, Klaviyo, and Instacart—Kennedy believes. 

The IPO “pop” is alive—kind of

There’s often debate when a company goes public over whether they “left money on the table”—investor speak for whether the company priced shares of their company too low, and could have gotten a higher price and raised more money. That can feel like the case when a company’s stock pops on IPO day, far above the price they set prior to public trading. With Arm (last week) and Instacart and Klaviyo (this week), the IPO “pop” seems alive and well, as all three companies saw their stocks soar at least 20% at some point during their first day trading. But it doesn’t mean that the companies left anything on the table.

“I think that’s pretty definitive now” that they didn’t, Kennedy says, considering their post-debut trading. With the “excitement around these being the first [big listings], I think there was some pent up demand. I think public investors probably looked at some of the recent trading as well in some of these high growth names, and were just sticking around, hoping for a pop buying in, and maybe disregarding the valuation.” 

There’s also two notable points here: One, all three of these companies had limited floats available at the IPO (meaning they didn’t sell a huge portion of shares to investors, thereby limiting supply); and two, although they all closed above the IPO price on their first day, Instacart and Klaviyo, in particular, saw the so-called pop lose a lot of steam later in the afternoon.

“You need to see both demand at the IPO price and aftermarket,” notes Kennedy. 

The P in IPO is for “Profitable-plus” 

It’s obvious at this point, but to hammer it home, other IPO hopefuls will need to give investors plenty of growth and profitability if they stand a chance in the current market. And even that might not be enough.

All three companies were profitable at their IPO (Instacart was profitable but showing some slowing growth, while Klaviyo and Arm were also profitable). Moving forward, “Investors want to see this elite group of companies that have rule-of-40 growth [a popular metric for determining healthy growth for software-as-a-service companies] and profitability,” Kennedy says. However, although some of these recent IPOs had that, trading has been blah. And there are plenty more tech unicorns in the pipeline that have weaker financials than Klaviyo that would therefore not garner a lot of demand, predicts Kennedy. 

For now, the market is closed to those who don’t have strong growth, profitability, and a “compelling” valuation, Kennedy believes. “Not a lot of tech companies can deliver on all three.” 

Cutting ties…Yesterday, venture capital firm GGV Capital sent a notice to its limited partners that it plans to separate its China and U.S. teams, as was first reported by The Information. That follows increased scrutiny from Congress officials over U.S. venture capital firms’ investments into Chinese startups. Earlier this year, a bipartisan House committee led by Wisconsin Representative Mike Gallagher had sent a notice to VC firms including GGV Capital that it was examining their investments in Chinese semiconductor, AI, and quantum computing companies. GGV Capital’s plans to sever ties with its Chinese operation follows a similar move from Sequoia Capital. A GGV spokeswoman directed Term Sheet to the notice they published on Twitter, but declined to comment further. —Jessica Mathews

Have a great weekend,

Anne Sraders
Twitter: @AnneSraders
Email: anne.sraders@fortune.com
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Joe Abrams curated the deals section of today’s newsletter.