IPOs Back? New Wave of Offerings Sets a ‘Higher Bar’ for Newcomers

The market demands more rigor in profitability and cash generation,” says Otavio Dantas, a partner at BCG, citing a new study from the consulting firm; Arm, Instacart, and Klaviyo are examples of the new trend

Instacart IPO at Nasdaq September 19th 2023 (Photo: Instacart)
September 20, 2023 | 07:23 AM

Bloomberg Línea — The successful conclusion of three IPOs in New York in recent days, with share prices at the top of the indicative range and demand exceeding the book of offers, signaled to the market an expected reopening of the window for initial public offerings in the coming months. However, the times of excitement and debuts of companies that deliver only rapid growth are behind us, and the newcomers are already an example. This is what Otavio Dantas, managing director and partner at BCG, stated.

“The market demands much more rigor in company profitability. The bar is higher for those looking to go public. Those who used to think of an IPO to raise capital and were burning cash will face difficulties,” said Dantas in an interview with Bloomberg Línea.

In this context, companies that meet certain conditions now highly valued by large investors increase their chances of listing, as indicated by a recently released study by BCG, “Tech Startups Should Prepare Now for the Next IPO Boom.”

There are differences that are already evident in companies that managed to break the still adverse moment for initial offerings compared to newcomers in 2020 and 2021.


These are the cases of Arm Holdings, a chip design company, Instacart, a supermarket delivery company with management and data intelligence solutions for retailers and online advertising, and Klaviyo, an email marketing and SMS automation platform using data.

Arm is an outlier that has some of the world’s largest technology companies as clients and made over $500 million in profit in the last fiscal year, with an operating margin of 29%, which it projects to have increased to 40% in the most recent quarter.

Instacart and Klaviyo also operate profitably—the former diversified its business beyond food delivery and now generates revenue from online advertising and software sales to retailers.


“Tech startups [seeking IPO] must demonstrate a clear path to profitability, provide specific evidence of strong growth in the industry, gather an experienced management team, and confirm their operational readiness for the public market,” the Boston Consulting Group’s study pointed out.

Having competitive advantages over peers and, subsequently, having clarity on the use of any funds raised and explaining this to investors are other recommendations.

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Addressing these issues, according to the consultancy, startups can develop a solid business plan and a compelling story that sets them apart from the competition. The study, based on past data, shows that tech companies that meet these requirements can, in 90% of cases, complete an IPO when the window reopens for offerings.

Damodaran: Fair value

The coming months also indicate that, aside from a successful IPO, prospects for stock appreciation are much less likely than during the heated period of 2020 and 2021, according to Aswath Damodaran, considered the “father of valuation” and a professor at NYU’s Stern School of Business.


“The idea that there is smart money, meaning that there is a group of investors who are somehow wiser, better informed, and less prone to emotional action than the rest of us and who earn higher returns than the rest of us, is deeply rooted,” Damodaran wrote in an analysis published on LinkedIn this Tuesday (19).

“For those who still believe that venture capital investors are the last bastion of smart money, it’s time to set aside that belief.”

“I hope that Instacart’s IPO will have a significant valuation on its first day of trading, especially considering the fact that the offer price seems to reflect a relatively conservative outlook for the company, and the price appears favorable,” he wrote before the start of trading in the company’s shares.


The shares rose as much as 43% at the beginning of the session this Tuesday and closed with gains of 12.33% at $33.70.

“Even if that doesn’t happen, I don’t see much benefit in buying the shares at the offering price [$30], not only because they seem to be fairly valued but also because I don’t see enough upside potential even if things go in the company’s favor,” Damodaran said, citing that more favorable assumptions would be needed, such as higher growth in the online food delivery segment or a higher take rate (commission) to justify higher share prices.

In the analysis, the “father of valuation” recalls a fundamental issue. “I have long argued that IPOs are priced, not valued based on worth... The difference between calculating worth and calculating price is that while the former requires dealing with business issues related to growth, profitability, and reinvestment, the latter is based on how much investors are paying for peer companies, a subjective judgment, but one that is still made.”

‘IPO Readiness’

BCG’s study, which was prepared before the final stretch of preparation for the IPOs of Arm Holdings, Instacart, and Klaviyo, already indicated the need for preparation for the upcoming window.


“The current adverse market conditions offer an ideal time for tech startups to lay the groundwork for going public. With preparation that generally takes 12 to 18 months, starting the process now will ensure that companies are positioned at the front of the line when market conditions for capital markets improve,” BCG said.

In this sense, the existence of momentum in the American IPO market supports what the study defines as IPO readiness. “The more IPO-ready companies, the greater the likelihood of a critical mass of offerings,” said the BCG partner.

“There are a few factors that already suggest the market’s recovery. One of them is volatility, which has fallen substantially compared to the end of last year and the beginning of this year. Volatility is a measure of uncertainty, something that weighs on the decision to buy an asset that is not well known,” he said.


According to him, multiples— in the report, future price/earnings—of tech stocks are also beginning to recover from the steeper decline, favoring offerings. In the tech sector, multiples are at 25 times P/E, after reaching 80 times in mid-2021, when the market was hot.

There is also a qualitative indicator, which is investor confidence and also begins to improve in response to these more favorable market conditions.

However, the gradual evolution of market conditions towards a reopening of the window may not necessarily result in a large volume of offerings, according to the BCG partner.


“There are few companies that are preparing themselves. It’s still a case here or there, of companies with a very good thesis, clear competitive advantage, and ‘round’ economics, with growth and profitability.”

According to BCG’s managing director, fundamentals should prevail even over the companies’ thesis, in an indirect reference to the market’s hype about Artificial Intelligence (AI), not just generative.

“I believe very much in AI. We see many use cases with very high business impact. It can be comparable to the impact of the internet 20, 30 years ago. But how many companies from that time are still around today? Thinking about going public, I see AI as a thesis that is still somewhat immature,” he said.


According to him, only exceptions should be able to go public, and it will be venture capital and private equity investments that should supply the resource needs for AI startups, not the public market.

In Brazil, the window has not even opened for isolated initial public offerings, but the moment is also approaching, said the BCG partner. This assessment is shared by bankers and professionals usually involved in such offerings.

“Brazil is a bit behind. When I look at the multiples of the Ibovespa or even the tech sector, I don’t see a reaction yet; they are close to historical lows,” he said. Besides global uncertainties, he pointed out local economic issues, such as pending reforms. “But I understand that this moment will also come for the domestic market; it may just take another six months,” said Dantas.


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