Instacart delivers 12% debut gain after $660m IPO

Instacart racked up a 12% trading-debut gain in one of the year’s biggest initial public offerings, showing investors are receptive to the online grocery delivery firm’s pivot to advertising and also adding momentum to a rebound for US listings.

Instacart’s shares opened trading Tuesday at $42 each after selling for $30 — the top of a marketed range — to raise $660 million for the company and selling stockholders in the year’s fourth-biggest US IPO. The shares, which jumped as much as 43%, closed at $33.70 in New York, giving the company a market value of $9.3 billion.

Instacart’s valuation rises to more than $11 billion on a fully diluted basis. That’s a steep plunge from its $39 billion valuation in a 2021 funding round when its business boomed amid pandemic lockdowns, but still ranks it as one of the biggest companies to go public in almost two years.

Instacart’s listing combined with Arm Holdings’s is giving equity capital markets much-needed relief after the longest drought since 2009 in the depths of the financial crisis. As a venture-backed consumer startup, Instacart’s success in its trading debut could pry open the IPO market for other companies looking to go public.

Marketing and data automation provider Klaviyo, which is set to sell its shares Tuesday, is planning to price its shares at the top of a marketed range or higher, Bloomberg News has reported. German footwear maker Birkenstock Holding Ltd. and Vietnam-based internet platform VNG are also preparing to list.

Climbing back

Even with Instacart’s IPO and Arm’s listings, only about $21 billion has been raised since January 1 on US exchanges, according to data compiled by Bloomberg. That’s finally catching up with the $22 billion at this point last year but still less than a 10th of the $250 billion total for the period in a record-setting 2021, the data show.

Semiconductor designer Arm raised $5.23 billion including greenshoe shares for owner SoftBank Group Corp. last week in the biggest US listing of the year. Its shares rose 25% on their first day of trading and remain up 7.8% from their IPO price.

Taking a cue from Arm, Instacart lined up big investors to support its listing. PepsiCo is buying $175 million of Instacart’s preferred convertible stock. It has also enlisted Norway’s Norges Bank, TCV, Sequoia, D1 Capital Partners LP and Valiant Capital Management as cornerstone investors that could take up to 60% of the shares, according to its prospectus.

Instacart’s IPO is a windfall for some of its earliest investors. Vinod Khosla said he bought a significant percentage of Instacart for about $1 million after seeing the company’s pitch at a Y Combinator Demo Day in 2012. That investment has paid off with a potential return worth hundreds of millions of dollars for the Khosla Ventures co-founder.

“It was very clear it was a useful service for consumers to have,” said Khosla, who also invested in DoorDash. While dot-com era grocery delivery startup Webvan collapsed, Khosla said Instacart improved upon the business model by cutting costly infrastructure such as warehouses. Khosla, who was an early investor in OpenAI, said he also sees the potential for artificial intelligence and other automated technology, such as robot delivery, to benefit companies like Instacart.

Instacart’s largest investors include Sequoia Capital with an 18% stake after the IPO and D1 Capital Partners with 13% of the shares, according to the filing. Other investors have included Tiger Global Management and Coatue Management, according to PitchBook.

The IPO is being led by Goldman Sachs Group Inc. and JPMorgan Chase & Co., with Bank of America, Barclays Plc and Citigroup also participating along with 15 other underwriters.

San Francisco-based Instacart, which is incorporated as Maplebear, sold 14.1 million shares in the IPO and existing stockholders sold 7.9 million, according to a statement. The company’s shares are trading on the Nasdaq Global Select Market under the symbol CART.

The company’s IPO puts the spotlight on its evolution from grocery delivery to advertising. Though still best known for its army of gig-economy workers filling shopping bags, Instacart has spent years building up its ad division — a higher-margin operation that capitalises on a trove of shopping data.

‘More options’

“Establishing themselves as a delivery channel — allowing things like product placement, marketing partnerships with consumer packaged goods companies — opens up a lot more options for Instacart as a company,” said Don Short, head of venture equity at InvestX Capital, a late-stage investor in Instacart.

Since Fidji Simo became chief executive officer in August 2021, Instacart’s ad focus has only intensified. The company has expanded from sponsored products and now lets users shop directly from videos and displays in the app. There’s also the Instacart Enterprise Platform, which allows retailers to gain insights into how ad and product placements translate into transactions.

Advertising now accounts for about 30% of Instacart’s revenue and offers higher margins than taking a cut of shopping purchases, according to its filings. The company generated $740 million from ads and other revenue that didn’t come from shopping transactions, up 29% from the previous year.

But Instacart’s success still hinges on people doing more of their shopping online, and orders have been flat in the first half of the year. Though delivery services surged during the coronavirus pandemic, most consumers still head to the supermarket to pick out their own food.

Instacart says that only 12% of grocery shopping is currently conducted online. And consumers who do try delivery apps often encounter headaches, such as the contractor having to substitute a product for something that’s out of stock.

Co-founder’s exit

In conjunction with the IPO, Instacart co-founder and former CEO Apoorva Mehta is stepping down as executive chairman. Mehta’s $1.1 billion fortune includes his stake in his new company, Cloud Health Systems, which aims to address chronic illness, Bloomberg News reported.

Mehta sold stock worth $21 million in the offering, but will retain a 10% stake as one of Instacart’s largest shareholders.