Instacart jumped 16 per cent in its trading debut, showing investors are receptive to the online grocery delivery firm’s pivot to advertising and adding momentum to a rebound for initial public offerings with one of 2023’s biggest listings.

Instacart’s shares opened trading Tuesday at US$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 rose as much as 43 per cent, were trading for $34.85 at 3:30 p.m. in New York, giving the company a market value of $9.6 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 Plc’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 Inc., 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 Ltd. are also preparing to list.

Climbing Back

Even with Instacart’s IPO and Arm’s listings, only about $21 billion has been raised since Jan. 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 per cent on their first day of trading and remain up 7.8 per cent from their IPO price.

Taking a cue from Arm, Instacart lined up big investors to support its listing. PepsiCo Inc. 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 per cent 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 Inc. 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 and D1 Capital Partners, 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 Corp., Barclays Plc and Citigroup Inc. also participating along with 15 other underwriters.

San Francisco-based Instacart, which is incorporated as Maplebear Inc., 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 capitalizes 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 per cent 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 per cent 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 per cent 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.