Instacart appears determined to go public in the final months of the year amid reports it has dropped earlier plans for a direct listing and will now undertake a traditional IPO comprised mostly of secondary employee stock.
ECM bankers confirmed the grocery delivery app had "tested the waters" with investors in recent weeks ahead of what could yet rank as one of the largest and highest-profile US IPOs in a forgettable year for new issues.
The Wall Street Journal reported last Monday that the IPO would see the company raise little in the way of primary capital and would instead focus mostly on giving its early employees an opportunity to sell shares.
Instacart had strongly hinted it was considering a direct listing when it revealed in May that it had filed confidentially with the SEC, but the pressure on growth stocks this year may have convinced it to take a more conventional route.
A direct listing, a process employed by the likes of Spotify Technology, Coinbase, Warby Parker and Palantir Technologies to go public in recent years, involves no capital raising and no lockups on insiders, allowing existing shareholders to sell immediately.
Direct listing advocates long complained that traditional IPOs were chronically underpriced, benefiting only a small group of Wall Street investors able to get a worthwhile allocation.
Yet dismal returns from last year's more than 300 IPOs (average declines of more than 40%) and the current new issue downturn have rendered many of those arguments moot. Institutional investors burned by both IPOs and direct listings are pushing back against "innovations" such as direct listings but also hybrid/blind auction bookbuilds and lenient lock-up structures that became commonplace in the tech IPO market during the boom.
Sensible
The traditional IPO route makes more sense for Instacart in current market conditions because it would be able to structure a deal to sell only a defined amount of shares and percentage of the company (perhaps 10% or less), put in place standard six-month lock-ups on shares not sold in the offering, and direct allocations to a mixture of long-only investors and hedge funds that could generate early liquidity and put upward pressure on the price.
Conversely, and in less liquid markets, a direct listing with no lockups on insiders could lead to share price pressure if all shares were immediately available to be traded and early selling by existing holders was not met with strong buyer interest.
“For any company right now, it is not a seller’s market,” one senior ECM banker said.
In March last year, Instacart marked a US$39bn valuation after raising US$265m from a new financing round led by existing investors including Andreessen Horowitz, Sequoia Capital, D1 Capital Partners, Fidelity, and T Rowe Price. However, the decline in growth company valuations since then could make it difficult to match that mark. Earlier reports had circled US$30bn as Instacart's possible IPO valuation.
Founded in 2012 by Apoorva Mehta, Instacart has established a well-known brand (with around 10m users and 600,000 "shoppers" or the gig workers that select and deliver the groceries) and has a well-developed shareholder base, previously an ideal profile for a direct listing.
On Monday, it introduced what it calls “Connected Stores”, or technologies that will help grocers build a seamless online and in-store experience. The technologies include a new version of its Caper Cart, an artificial intelligence-powered smart shopping cart equipped with scales, sensors, touchscreens, and computer vision technology that will mean in-store shoppers do not have to manually scan items.