ESO's Monthly Start-Up

September 2023

The Return of the IPO

The past year and a half has been icy for late stage private companies looking to go public, prompting everyone to speculate on when things might pick up again. According to EY, and as presented on the graphs below, the number of US IPO deal counts and proceeds have plummeted in 2022 and the first half of 2023, with deal count combined over this period down over 63% from 2022. IPO proceed numbers have seen an even more aggressive decline, down nearly 88% over the same period.

While Cava and Oddity IPO’s have been recent successes, its been 20 months since a notable venture backed tech company when public in the U.S., and many investors have been growing impatient. However, August brought some news that the thaw might be on, with Instacart, Klaviyo, and Arm all indicating that they will be IPO’ing in September. This is a big deal for VCs who have been feeling the liquidity crunch, as most notably exemplified by Tiger’s liquidity issues which TechCrunch recently wrote about. The IPO’s are sure to be a bellwether for other late stage tech companies on the sidelines, so lets do a breakdown of each one and give some more information on what investors might be able to expect.

Instacart has been on the list of tech start ups that might open the IPO market for some time, and after filing on the 25th, its debut on the public market is poised to be the first significant venture-backed tech IPO since December 2021. However, Instacart is up against some challenges hitting the public market, the biggest of which being its valuation. Instacart’s latest internal valuation was $12 billion as of April, far and away less than the $39 billion valuation at which they raised their March 2021 round. As for their financials for the first six months of 2023, the company brought in $1.5 billion in revenue and $242 million in net income, an improvement from the $1.1 billion in sales and a $74 million loss in there same period last year. However, growth of the grocery business has slowed significantly, and investors might be worried that the company can’t meet the promises it made back in 2021 when it commanded the $39 billion valuation.

Klaviyo, a data and marketing automation company, has also been on the shortlist to kick off the IPO market thawing, and arguably is in a better position than Instacart to be successful. Founded in 2012, Klaviyo helps companies store user data and build profiles on them to send targeted marketing via email, text messages and other channels. It got its start in the e-commerce industry by primarily serving online businesses, though Klaviyo said it’s seeing growing demand from companies in other verticals like restaurants, travel, and events and entertainment. While the company commanded a valuation of $9.5 billion when it last raised in 2021, like Instacart, they may have a tough time getting that. At prevailing valuations for other comparable public companies, such as HubSpot and Braze, Klaviyo is likely to be valued at around $5.3 billion, 40% lower than that last raised price. For financials, the company posted revenue of $164.6 million for the quarter ended June 30, a 51% increase from the same period last year. Additionally, gross margins climbed to above 75% for the first half of this year, higher than the 70% levels in both 2021 and 2022. Speculation aside, both of these IPOs will serve as great data points to help figure out where primary and secondary values for other late stage private companies should be. As Pitchbook put it, “An IPO is a price discovery mechanism."

And finally, onto the big one, the Arm IPO. The chip designer’s planned IPO is expected to be the biggest of the year, and Softbank is relying on a successful exit here to bolster its portfolio that has gotten beaten up during the bear market. Softbank acquired ARM Holdings in July 2016 for $32 billion. After the sale, it subsequently sold 25% of the business for $8 billion to the Vision Fund, which was set up to invest in new technologies. However, as of August of this year, Softbank has bought back the stake in Arm at a valuation of $64 billion. The deal signals the valuation Softbank could aim to achieve from the initial public offering. As of this morning, SoftBank said it was seeking an equity value of $50 billion to $54 billion as part of the roadshow for Arm’s initial public offering, factoring in shares issued to employees that are yet to vest. Like Instacart and Klaviyo, it remains to be seen if the market will buy into this price.

Why this matters: People are going to be analyzing and speculating on these three companies until the day they IPO. Ultimately however, the public market is going to be the decider on what happens. What we do know for certain though is this: however the public markets react to these IPOs, we will at least finally get some indication of a reasonable expectation of value for late stage companies as we move out of the boom time fund raising years of 2020 and 2021.

Tips of the trade

A section where we provide helpful tips for anyone with stock options or shares at private companies.

Stock Options 101

The Basics: a guide for those new to stock options, and a refresher for startup vets.

Stock Options

Stock Options grant you the right to buy or “Exercise” shares of your company’s stock at a set price: the “strike price”.

You typically earn or “Vest” your options over a 4 year period, and must exercise them within 90 days of leaving the company… or they expire.

When you exercise you will pay taxes on the difference between the strike price and the current Fair Market Value or “FMV”.

Example:

10,000 options with a strike price of $1 cost $10,000 to exercise.

If the FMV at the time of exercise is $4, the employee will owe taxes on $30,000 of taxable gain (10,000 options x $3 gain per share).

Once exercised, you will own shares of your company’s stock that you can hopefully sell down the line after an IPO!

Valuing your equity

The most conservative valuation method for your equity is simply the FMV. This is what an independent valuation firm deemed the common stock of your company to be worth, and the IRS uses this value for your taxes. Luckily, you pay taxes on this super conservative number.

The best metric for valuing your equity is the “Last Round Preferred Price” which we call “LRP”. This is the most recent price paid by Venture Capitalists for preferred stock in your company. It is potentially an aggressive current day valuation as VCs pay a premium for the special rights that come with preferred stock (board seats, liquidation preferences etc). That being said, most Secondary Market transactions occur at either a discount or premium to the LRP.

Your company should provide you with the value if you ask (it is publicly filed information after all), but if not, feel free to reach out to ESO Fund…. we have it.

Example:

The 10,000 shares with an FMV of $4 can conservatively be valued at $40,000. If the LRP is $10, they could be worth as much as $100,000.

How to use Last Round Preferred Price to value your equity?

1) It is a good ballpark for today’s value, and a better floor for future. Investors considered the company’s stock to be worth that much and will potentially lose money if an exit occurs below that value. Because of this you can view the LRP as a safe future exit floor - anything below that number would be considered a poor exit by the company’s investors. Investors of course expect the company to exit for even higher than LRP, otherwise why invest their money?

2) You can determine the market outlook on your company. If you compare Secondary Market pricing to the LRP, you can determine how “hot” your company’s equity is. In the BULL market of 2021 many shares traded above their LRP, while today most company’s shares are trading at a steep discount.

3) You can determine proximity to an IPO using the LRP and FMV. The FMV is determined by an independent valuation firm who essentially takes the LRP and sets a discount due to lack of marketability. Early stage companies will have an FMV that is closer to 10% of their LRP while later stage unicorns may have an FMV that is more than 50% of their LRP. When a company IPOs common stock (FMV) and preferred stock (LRP) are one and the same, so the closer the FMV is to the LRP, the closer the company is to an exit.

Next month we will talk about the different paths to liquidity for private shareholders.

Financing your option exercise can be expensive and a require a large capital outlay. Feel free to reach out to us to discuss your options for partnering with ESO to exercise your options risk-free.

The ESO Fund does not provide legal, financial, or tax advice.

Layoff Declines Continue

Layoffs for August have followed the trend we have seen over the past couple of months, and have seen further declines. Both the total number of employees laid off in August and the total number of companies that experienced layoffs saw declines from the previous month, down by 29% and 28%, respectively. Total layoffs for the month were led by Getir laying off roughly 2,500 employees and Zebra Technologies laying off 470.

Why this matters: As the layoff trends continue to normalize, and the IPO market begins to heat up again, we hope to convert this section of the newsletter into an IPO tracker within the next couple of newsletter editions. Stay tuned for that update!

Brought to you via layoffs.fyi

Secondary Market Sentiment:

The graph below displays the ratio of buyers vs sellers for a given month on the private secondary market. Months with more buyers than sellers are displayed in green while months with more sellers than buyers are displayed in red. All data pulled from Zanbato, the below list does not imply completed transactions, simply intent to either buy or sell shares.

With the recent IPO filings we assume the secondary market is waiting on pricing before bids tick back up. It is possible as well that many shareholders placed offers to sell based on hopes of piggy-backing onto the IPO momentum.

Either way, an uptick in secondary activity after a couple of low volume months is a good sign for future months. As we have hit on numerous times now, this whole thing depends on how the IPOs fair.

Public Multiples Check-in: "Yesterday's Price is not Today's Price"

Market volatility has continued to impact multiples into August. Fintech multiples saw an increase in July, however, they was a year over year contraction of 6% in August. Enterprise SaaS and Real Estate have continued to trail the previous year, though Healthtech saw a small increase in August. Industrials and Crytocurrency both saw multiples increase 7% and 29%, respectively, year over year.

Why this matters: Not a whole lot of changes here from July, and the market has continued to do well in spite of a couple of negative indicators. While we are definitely not out of the woods yet, the NASDAQ and S&P gains this past year are reassuring. With the market having performed as well as it has, it will be interesting to see how it responds to the IPOs on the docket for next month.

August's Top Ten:

  1. We talked in our intro about there being no tech IPOs in 20 months. However, there was a SPAC that occurred this month, as Better.com SPAC’ed out with Aurora Acquisition Corp. on the 23rd. There was only one word for what happened to the stock price as soon as it hit the public markets: carnage. The stock price declined over 90% that day, and as of writing this, is currently trading at $0.80 a share, a massive decline from the $17 a share they targeted. Everyone kind of knew this was going to be a trainwreck considering what the current mortgage environment is like right now, but CEO Vishal Garg said that it had to be done so they could tap into capital it would receive from Softbank on exit.

  2. Surprisingly, there was in fact some other big news that happened in August outside of the IPO news. One of which was Databricks reportedly holding talks with T Rowe Price group on a new fundraising round that would bring the big data software giant’s valuation to more than $43 billion. For context, the company raised a $1.6B Series H round in August 2021 at a $38B valuation.

  3. Softbank is suing the now defunct company IRL for fraud. Softbank alleges that the company gave them fake numbers, and if they knew what was actually going on at the company, they wouldn’t have invested at the $1.1 billion valuation. In addition to Softbank’s lawsuit, IRL is currently being probed by the SEC to determine whether the app violated security laws by misleading investors.

  4. It wouldn’t be a 2023 top ten if we didn’t talk about AI. OpenAI is reportedly on track to generate over $1 billion in revenue over the next year, blowing past the company’s previous revenue projections. The AI-giant was last valued at $27 billion earlier this year, and generated just $28 million in revenue last year before charging users for ChatGPT.

  5. Continuing in the AI news, Hive AI, a San Francisco-based software company that uses AI to moderate digital content, is reportedly working to raise $200 million in a funding round, with a valuation of up to $4 billion. The funding round would come two years after Hive was valued at $2 billion in an earlier round.

  6. Fintech startup Ramp had one of the biggest fundraising rounds of August, raising $300 million in a funding round co-led by existing backer Thrive Capital and new investor Sands Capital at a post-money valuation of $5.8 billion. This is notably a 28% lower valuation than they raised last March 2022.

  7. There were a decent number of unicorn fire sales this month. Most notably, Yieldstreet is nearing a deal to acquire real estate tech startup Cadre at a valuation around $100 million. This is a sharp discount from Cadre’s peak valuation of $800 million from six years ago. Additional fire sales this past month include Hopin selling its core business to RingCentral, and storage startup Clutter being sold for pennies on the dollar to a backer.

  8. Lack of liquidity has plagued many VCs over 2022 and 2023, and Tiger has recently been in the spotlight for this. Notably this month to try to get some money back for their investors, Tiger is close to a deal to sell part of its stake in artificial intelligence startup Cohere that values the startup at about $3 billion. This deal will value the startup 40% higher than its most recent June financing for a $63 million stake.

  9. The Biden administration put out an executive order this past week that will restrict U.S. private equity and venture capital investments in Chinese technology. More specifically, Biden is targeting investments in technologies like semiconductors, quantum computing, and artificial intelligence on concerns that China’s advancements in those areas run counter to U.S. national security interests.

  10. With Betterup’s recent layoff off of 16% of its staff, employees seem to have one burning question, “If the company can’t afford to keep its total workforce, how can it afford to keep Prince Harry on as Chief Impact Officer?” Harry has been with the company since 2021, but according to one staffer, his day to day responsibilities include “zero things.”

Why this matters: It appears that there is a dichotomy forming in the VC ecosystem between the explosion of AI and the opening of the IPO market and also stories of down rounds and fire sales for other once hot VC-backed companies. There is clearly a shift that has been going on for a while in the post Covid and 2021 boom that VC experienced, and its sink or swim for late stage companies that were not able to exit in time.

Startups that are still hiring!

Open positions are per the company's website.tember

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