It's the return of the tech IPO. Instacart says it's profitable — and this may be the necessary secret ingredient for a hot market debut in 2023.

  • Tech startups Instacart and Klaviyo filed to go public, marking the return of the tech IPO.

  • IPOs have been near nonexistent over the last year and a half thanks to a volatile stock market.

  • Instacart and others going public are profitable, a bar others may have to meet to be successful.

The tech IPO is back. After a long hiatus, the IPO market is finally showing signs of life thanks to the long-awaited declaration that Instacart is planning to go public.

After SoftBank-owned chip company Arm decided to test the waters of the market earlier this week, Instacart and marketing automation company Klaviyo are now the first venture-backed tech companies to file for IPOs since December 2021. That's when software company HashiCorp and cloud tech company Samsara went public.

Here's one thing Arm, Instacart, and Klaviyo have in common: profitability. And that may be the secret sauce to a successful public debut.

Instacart revealed profits of $428 million in 2022 and $242 million for the first six months of 2023. Arm posted profits of $524 million for the fiscal year that ended in March and $105 million for the quarter that ended in June. And Klaviyo reported a $15 million profit for the first six months of this year.

That Instacart and Klaviyo are profitable could make them attractive to investors who became skittish in the downturn. The strong business fundamentals wring out some of the risk of such investments, said Tom Loverro, a general partner at IVP. Though, he says profitability isn't necessarily a requirement of going public.

"I don't think profitability is like the rule. But it's hard to be interesting. You either need to be such a rocket ship that people are like, 'You're unprofitable, but oh my god, this could change the world. Take my money.' Or, you're in the bucket of, 'I don't know if it's going to change the world but at least it's profitable. I'm less likely to lose,'" Loverro said.

IPOs have been few and far between in the past year due to market volatility. Only 149 IPOs launched in the US last year, the lowest total since 2016. That's compared to 908 companies that went public in 2021, according to S&P Global. A shaky market has also caused venture capital investors to pull back on funding, making it difficult for many startups to raise funding and grow their businesses.

Instacart, which was founded in 2012 and has grown to be a frontrunner in the grocery delivery space, has long teased plans to go public. The move has been highly anticipated by industry insiders as a sign the IPO market is on the mend. The grocery delivery company's biggest backers include Sequoia Capital and D1 Capital Partners, which each own at least a 5% stake.

And Klaviyo, also founded in 2012, has received funding from VCs and private equity firms alike. Its biggest investors include the PE firm Summit Partners, Shopify, and VC firm Accomplice.

As of late, it hasn't been good news for companies that have gone public. Better — the mortgage company whose CEO became infamous for firing 900 employees via a Zoom call —merged with a special purpose acquisition company, absolutely tanked on its first trading day to the tune of 95%.

But in recent weeks, a rally in the stock market has startup backers feeling optimistic. "We all want to see signs of life," said Joe Kaiser, a managing director at Mercato Partners. "There's absolutely pent-up institutional demand. There's a lineup of amazing companies that are ready to go public."

These companies with the patina of profitability have something else in common: name recognition.

Kaiser said institutional investors want to lead out with startups like Instacart and Cava, a Mediterranean restaurant chain that went public in June, because retail investors will know them and support them. In July, its first full month as a publicly traded company, shares of Cava jumped 39%. That same month the beauty and wellness company Oddity saw a 35% pop in its Nasdaq debut. Enterprise software startups are watching these launches closely with the hope that the consumer startups will be successful, so they can be fast followers.

"Everyone wants to be second, third in line," Kaiser said. "No one quite wants to be first."

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