Tech IPOs Make a Comeback: Insights from WSGR’s Recent Report

Wilson Sonsini Goodrich & Rosati recently released an advisory shedding light on the resurgence of Initial Public Offerings (IPOs) in the tech sector. The law firm has a history of helping tech startups navigate complex legal landscapes and specializes in business, securities, and intellectual property law.

According to the WSGR advisory, recent IPOs involving tech giants Arm, Instacart, and Klaviyo have rekindled hopes for the return of the IPO in recent weeks. After an 18-month hiatus due to economic uncertainty and market volatility, these IPOs are signaling a potential revival. 

But what factors contributed to their success? What can we expect from the tech IPO landscape in the coming months? Let’s take a look at what WSGR found. 

Investor Demand and Strong Pricing

According to the WSGR report, one of the first signs of a renewed IPO market is the strong investor demand witnessed during the recent tech IPOs. Arm, Instacart, and Klaviyo all attracted prominent investors, suggesting a resurgence of interest in tech stocks. While these stocks experienced some trading volatility, they priced at or above the top end of their ranges, reflecting investor enthusiasm.

Profitability Takes Center Stage

According to the findings in the report, in the current market, profitability or the potential for profitability has become a crucial factor for tech IPOs. Companies can no longer rely solely on growth to entice investors. Arm, Instacart, and Klaviyo all reported positive GAAP net income in their most recent periods. Some even achieved significant profits over consecutive periods. As discussed in the WSGR report, the emphasis on profitability extends to holistic disclosure beyond just financial numbers. For instance, Instacart’s Management Discussion and Analysis (MD&A) delves into its profitability philosophy and strategy.

Revenue Growth Remains Essential

While profitability is paramount, revenue growth continues to be a significant consideration for investors, as emphasized in the report. Instacart and Klaviyo demonstrated that it’s possible to prioritize profitability while maintaining robust revenue growth. Instacart’s revenue grew by 31 percent year-over-year in the first half of 2023. Klaviyo’s revenue surged by 56.5 percent year-over-year. Even Arm, despite a recent revenue dip, exhibited a 33 percent growth between 2021 and 2022. Investors are keenly evaluating the drivers of revenue growth, which can include segments like advertising, as seen in Instacart’s case.

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Valuation Challenges

The report also highlights the question of valuation, which has loomed large over the IPO market. While the recent IPOs indicate that market upside remains, valuations have not yet reached their pre-pandemic peaks. Instacart and Arm saw substantial decreases in implied IPO valuations, whereas Klaviyo’s remained consistent with its previous financing. This suggests that companies may need to consider launching their IPOs at a discount compared to their last valuations.

Key Investors and Momentum

After an 18-month hiatus, the support of key investors, as discussed in the report, has become crucial in attracting reluctant investors back to the market. Arm, Instacart, and Klaviyo secured interest from headline investors like AllianceBernstein, BlackRock, and Sequoia, along with strategic investors like Google, Intel, Nvidia, and Samsung. Instacart even garnered indications of interest to purchase up to 61 percent of its offering. Attracting top-tier investors can give IPOs momentum, higher pricing, and post-IPO price stabilization.

Creative Lock-Up Approaches

Lock-up periods have also evolved, as detailed in the report. Instacart and Klaviyo have allowed current employees to sell a portion of their stock sooner than the traditional 180-day lock-up period, provided certain conditions are met. Such flexibility can be attractive to employees, particularly in today’s market. Meanwhile, companies should continue to monitor and comply with Rule 701 and Section 12(g) regulations as they navigate the IPO process, as advised in the report.

The Way Forward for Tech IPOs

The report concludes that the successful IPOs of Arm, Instacart, and Klaviyo have rekindled the hopes of companies with IPO plans on hold and those considering going public for the first time. The benefits of a traditional IPO include greater access to financial markets, employee motivation through equity liquidity, investor liquidity, increased credibility, and brand recognition. However, there are potential drawbacks, including the focus on short-term results, SEC regulation, legal exposure, and reporting cycles.

To prepare for an IPO in the current market, companies should focus on business readiness, select key metrics, engage in investor education, enhance controls and systems, and consider post-IPO governance structures. Additionally, companies should monitor legal compliance and address deal terms that could hinder an IPO.

As we move forward in 2023 and 2024, cautious optimism surrounds the tech IPO market. While macroeconomic factors and stock performance of recent IPOs will play a significant role, meticulous preparation and strategic decision-making will determine the success of tech IPOs in this evolving landscape. For companies considering an IPO, the time may be right to seize the opportunity when the IPO window opens. To learn more, check out the full advisory here.