Goldman Sachs can't handle it either, is the IPO window for US stocks closing again?

Venture capitalists are advising start-up companies to postpone their plans for listing in the US until interest rates stabilize, as the lukewarm performance of SoftBank's chip design company Arm and delivery company Instacart has dampened the expectations of other tech start-ups.

Instacart's IPO was seen as a key indicator for other unlisted tech companies, with its stock soaring 40% on its first day of trading. However, as of the end of September, its share price was still below the $30 IPO price.

As the largest IPO globally this year, Arm experienced significant volatility in its stock price in the two weeks after listing, sometimes trading above the $51 IPO price and sometimes below it. By the end of September, its stock price was 5% higher than the IPO price.

In comparison, email marketing platform Klaviyo saw the highest increase, with its stock price rising 15% above the IPO price.

It is worth mentioning that all three companies were underwritten by Goldman Sachs, known as the "king of Wall Street," but their post-listing performance is still intriguing. In addition, after the Federal Reserve hinted at another interest rate hike on September 20 and fewer rate cuts in 2024 than expected, the outlook for the US IPO market has undergone a significant change. Is the IPO window that just opened about to close again? When will the dreams of dozens of tech start-ups to list in the US come true?

Venture capitalists believe that now is not the ideal time for IPOs. PitchBook, a private market data company, estimates that there are currently 80 companies with IPO plans in backlog. They advise their portfolio companies to put their IPO plans on hold unless absolutely necessary. Mike Volpi, Managing Partner at Index Ventures, said:

Within our investment portfolio, we would advise: unless it's absolutely necessary, put your IPO plans on hold. The market has been extremely volatile in the past few weeks...unless you have to go public, wait until the second half of next year.

Jason Greenberg, Co-Head of Global Technology, Media, and Telecommunications Investment Banking at Jefferies, said:

Going public still carries risks, and the most likely start-ups to IPO are not those seeking capital for growth or liquidity for employees. "Everyone thinks that IPOs are done for, but that's not the case," said Paul Kwan, Managing Director of General Catalyst, a venture capital firm and former head of Morgan Stanley's West Coast technology banking division. He believes that the three IPOs in September were a significant turning point.

Kwan said that IPOs are unlikely to pick up again until interest rates stabilize, and he expects an increase in mergers and acquisitions among private companies in the next six months. As the valuation of unlisted companies is based on future cash flows, rising interest rates will have an impact on startups that are still not profitable.

"Perhaps the IPO window in the US has only opened a crack," said Don Butler, Managing Director of Thomvest, a venture capital firm. He warned that some companies may be forced to go public early because they need new capital to survive or grow. He also mentioned that some companies are rushing to go public mainly to pay the tax bills related to employee stock units.

In recent years, many Silicon Valley startups, including Instacart, Klaviyo, and payment company Stripe, have offered restricted stock units (a form of equity incentive) to their employees, allowing them to receive company stock at no cost when the company is acquired or goes public.

In March, Stripe raised over $6.5 billion through a private stock sale, partly to pay the tax burden related to these restricted stock units, according to an insider. According to Instacart's S1 filing, the company used "almost all" of the funds raised from its IPO to pay for the costs related to restricted stock units.

Klaviyo used nearly $60 million of the funds raised from its IPO to settle outstanding restricted stock units.

According to Don Butler, the third factor forcing startups to go public is the liquidity demand from investors. The investment horizon of venture capital firms is typically longer than that of private equity or stock market investors, with a typical fund lifecycle of 10 years. The return on investment of these funds is proof for raising the next fund, which typically includes pension funds, endowments, and other institutional investors.

However, venture capital firms need their invested startups to go public or find other exits, such as being acquired, in order to distribute returns to their investors. Some venture capital firms are willing to accept the risk that these companies may not be valued as expected in order to complete the transaction, according to Butler.

Peter Hébert, Co-founder of Lux Capital, a venture capital firm, said that the performance of Instacart, Klaviyo, and Arm proves that the IPO window has only opened a crack. However, Hébert said:

Despite stock market investors being more cautious in recent years, mature companies with promising prospects can still achieve public financing.

In any case, Klaviyo has provided a more encouraging signal for other pre-IPO companies, especially those that serve enterprise customers rather than consumers. Klaviyo continues to grow rapidly while other companies are downsizing, and its market value is close to the $9.5 billion private valuation set in 2021, based on current trading prices.

However, according to Greenberg, even the prospects of the most promising IPO candidates are unlikely to become clear until interest rates stabilize and the economic outlook becomes more certain.

"Is the window open? It's 100% open."

"Do I think the listing will take off? No, we still have to wait another 6 months."