The IPO of the shipping platform is a valuable lesson for venture capital funds

When Instacart goes public on Wall Street next week, it will leave many of its investors with significant losses on paper — a testament to the pain venture capitalists face after years of easy and quick spending.

The grocery delivery company is aiming for an IPO with an estimated value of up to $10 billion – significantly lower than the roughly $39 billion valuation that was placed on the company at the height of the start-up funding frenzy two years ago. Many of the investors who poured nearly a billion dollars into Instacart in the last three funding rounds will be “underwater” about their investment (invest at a higher valuation).

Instacart partners with retailers to advance the digital capabilities of their business. Its technology includes three areas: Marketplace, platform for business and advertisements. According to its prospectus, it works with over 5,500 brands and 80,000 stores, and in the year that ended at the end of June, it made 263 million orders. According to the company, it helps retailers reach 7.7 million monthly active customers, who spend an average of $317 a month on Instacart.

For example, T. Rowe Price: the investment house’s growth stock fund invested $86 million in Instacart, starting in 2020, according to reports to the Securities and Exchange Commission. The value of this investment will decrease by more than 40% if the offering is carried out in the target price range The last one published by the company.

Also DST Global, a venture capital fund that became famous thanks to its early bet that Facebook would succeed, which invested about $75 million in Instacart in 2020, or General Catalyst, which invested about $50 million – both are expected to have losses on paper of more than 35% on their investments.

Investors who bought in 2015, when Instacart did its third round of fundraising, or later, would have made more if they had invested in the Nasdaq index during that time.

These results highlight a difficult reality for venture capitalists: the billions of dollars poured into late-stage startups in a period of cheap money may have gone down the drain even when the most promising companies in their portfolios went public.

“Private investors will be required to adjust to this reality of resetting valuations,” said Byron Dieter, a partner at Bessemer Venture Partners. “There will be a lot of gloom around the IPOs.”

Instacart’s IPO price target range, $28 to $30 per share, gives it a valuation of between $9.2-9.9 billion. Its expected IPO on Monday comes after a rather prolonged stalemate in the technology IPO market, and is therefore expected to draw attention among market insiders to Wall Street’s appetite for new stocks.

Startup founders hesitated to issue their companies, in view of the market decline last year, fearing that they would receive an IPO price significantly lower than their current estimates. This led to a slowdown in issuances for almost two years, and caused substantial harm to venture capital companies, which is an important source of income for them, and accordingly to their financial performance.

This year saw a rally in tech stocks that sent the Nasdaq up more than 30%, giving entrepreneurs more confidence to consider IPOs for their companies. Instacart’s investors are not selling shares in the IPO, and are expected to hold their shares for at least a few months after the IPO. They may even win see an increase in profits from their investments if Instacart stock goes up.

Enjoys positive momentum in her business

Last week, the British chip maker Arm’s IPO took place, which was carried out far below the valuations placed on it, but its shares jumped more than 20% on their first trading day – last Thursday.

After Arm’s surge, Instacart raised its IPO price target range by more than 7%.

The company recently enjoyed momentum in its business, when it presented five consecutive quarters of operating profit, a rare achievement for a start-up in the field of the “reconciliation economy”. Still, the growth of the core activity in the field of deliveries fell sharply from the peak recorded during the Corona days.

Instacart was established in 2012 (under the official name Maplebear) in Delaware and currently operates from San Francisco. It employs approximately 3,486 people. In 2022, the company moved to a net profit, and in the first half of 2023 it recorded a net profit of $242 million and an adjusted EBITDA of $279 million, on revenues of $1.48 billion (31% growth compared to the first half of 2022).

Investors who put money into Instacart early on—the bread and butter of venture capital—still stand to make a lot, even if not as much as they thought.

Sequoia Capital, Instacart’s largest outside shareholder, invested $8 million in one of the earliest funding rounds in 2013. That initial investment turned into a stake worth about a billion dollars. Another big gainer is the company Andreessen Horowitz, who led an early-stage fundraising round at Instacart a year later.

Investors who suffered losses on paper put much more money into later funding rounds, as cheap money flowed into Silicon Valley. As of 2020, Instacart has raised three rounds of capital in a row, nearly tripling its valuation within a year.

A warning sign for bull market investments

Since then, the company has become a warning sign against investing in a bull market. Last year, technology stocks experienced declines as the sharp rise in interest rates caused investors to avoid high-risk companies. Technology stocks that have been successful in the past, such as DoorDash from the delivery sector and Uber from the collaborative travel industry, have faltered. Some of Instacart’s valuation metrics have fallen in their wake. Thus the company cut its internal valuation to $12 billion earlier this year, which resulted in a drop in employee and investor morale. Uber and DoorDash have bounced back from the lows they hit in 2022, with the former up more than 90% this year and the latter climbing more than 60%.

But today investors are backing away from bold investments, and in Silicon Valley the giant funds no longer compete with each other to see who will invest more in startups. Many of them refocus on what has historically been proven to be the source of the best return – a small check list for young companies.

While over the years Sequoia’s bet on Instacart reached almost $300 million, the fund made most of the profit from the small initial investment in the company: $8 million invested in 2013 and $13 million invested in 2014, according to sources familiar with the transactions.

Sequoia had less luck with later investments – the same $50 million that flowed in Instacart’s fundraising round in 2021 will turn into a share worth $12 million or less at the time of the IPO.