Cart blanche

Two and a half years ago, a group of investors valued Instacart at $39bn.^{5SiliconANGLENew $265M round lifts Instacart's valuation to $39B2 Mar 2021} On Tuesday the grocery-delivery firm, which is formally called Maplebear, began trading on the Nasdaq under the ticker CART at a price that valued it at nearly $9.9bn on a fully diluted basis.^{3Retail DiveInstacart lifts target IPO share price range18 Sept 2023,6Reuters, via BusinessDayInstacart shares jump 43% in Nasdaq debut19 Sept 2023} That is about a quarter of the earlier figure. Nobody at the firm has lost any groceries in the interval, only the faith of those who wrote the cheques.

The listing was priced at $30 a share, the top of a range that had been raised from $26-28 to $28-30 only days earlier.^{1SEC EDGARMaplebear Inc. (Instacart) final prospectus, Form 424B418 Sept 2023,3Retail DiveInstacart lifts target IPO share price range18 Sept 2023} The reason for the change of heart was another firm’s debut. SoftBank’s Arm sold 95.5m shares at $51 on 13 September, raising about $4.9bn,^{2ArmArm Announces Pricing of Initial Public Offering13 Sept 2023} and its shares opened almost 25% above the offer price.^{3Retail DiveInstacart lifts target IPO share price range18 Sept 2023} Instacart’s bankers watched and reached for the eraser. When CART opened on Tuesday it did so at $42, 40% above the offer, and at the day’s high the company was worth about $14bn.^{4IPOScoopThe IPO Buzz: Instacart (CART) Jumps 40 Percent in its NASDAQ Debut19 Sept 2023}

Instacart’s pitch was better than that of most technology offerings of recent vintage, because it makes money. Its prospectus reports revenue of $2.55bn in 2022, up from $1.83bn a year earlier, on gross transaction value of $28.8bn and 262.6m orders.^{1SEC EDGARMaplebear Inc. (Instacart) final prospectus, Form 424B418 Sept 2023} Net income was $428m, against a loss of $73m in 2021, though $358m of that was a one-off tax benefit, which leaves an underlying profit nearer $70m.^{1SEC EDGARMaplebear Inc. (Instacart) final prospectus, Form 424B418 Sept 2023} In the first half of 2023 it earned $242m, compared with a loss of $74m a year before.^{1SEC EDGARMaplebear Inc. (Instacart) final prospectus, Form 424B418 Sept 2023} Revenue amounts to less than a tenth of the value of the groceries that pass through the app. It is a decent business, not a printing press.

We think the lesson of the week is that the window has reopened, and that it opens on the buyer’s terms. Reuters describes a “near 18-month dry spell” for American listings, and David Erickson of the Wharton School calls the market “very much a ‘buyer’s market’ for now”.^{6Reuters, via BusinessDayInstacart shares jump 43% in Nasdaq debut19 Sept 2023} He expects the discount on IPO pricing to shrink if the next several listings “price well and continue to trade well”.^{6Reuters, via BusinessDayInstacart shares jump 43% in Nasdaq debut19 Sept 2023} One day’s trading does not settle that, and two flotations in a week do not make a season. They are, though, the first sign of one in a long while.

The strongest objection is that the haircut proves nothing. The $39bn figure dates from March 2021, when the pandemic had made delivery a necessity and money cost almost nothing, and a mark struck at that moment says little about what the business is worth now. That is fair, and it is the point. A private valuation is a price agreed between two parties who are not obliged to sell to anyone else. A public one is a price that a stranger will pay on a Tuesday. Founders and venture investors who have kept their 2021 marks on the books are now offered a rare, public test of them.

There is a consolation for the sceptics: not everyone is heading for the exit. PepsiCo agreed to buy $175m of convertible preferred stock in a private placement at the same $30 price, to close right after the offering.^{1SEC EDGARMaplebear Inc. (Instacart) final prospectus, Form 424B418 Sept 2023} Selling stockholders are offering 7.9m of the 22m shares on sale, so most of the money, about $423m at the offer price, goes to the company.^{1SEC EDGARMaplebear Inc. (Instacart) final prospectus, Form 424B418 Sept 2023} Roughly 277m shares will be outstanding afterwards.^{1SEC EDGARMaplebear Inc. (Instacart) final prospectus, Form 424B418 Sept 2023} A seller who parts with a few per cent of the stock is behaving more like an owner than a runaway, which is more reassuring than any first-day pop.

Our advice to the large pool of unicorns waiting in the wings is simple. The market will take profitable firms and will, grudgingly, take growing ones. It will not take a valuation from 2021 as a gift. An IPO, unlike a funding round, ends with a number that cannot be negotiated.