Après Moi, le Déluge

Arm, a chip-designer, IPOed past Thursday with its shares jumping by 25% in its first day of trading reaching a market cap of $85B.

Fueled by low interest rates, US tech IPOs reached a record number in 2021. But 2022-23 marked a tech IPO drought as the Fed increased interest rates to combat price inflation, which negatively impacted trading multiples.

Investors then switched to emphasize profitability over growth.

Mission given; mission accomplished.

In the recently published Cloud 100 ranking, 23 startups are already profitable, and 62 should reach cash flow breakeven by the end of 2024. This was achieved by stepping on the sales brake pedal – indeed, the yoy average growth of the Cloud 100 members decreased from 100% in 2022 to “a mere 55%” in 2023. Since most Cloud 100 startups are tech (high gross margins) and SaaS (recurrent revenues), by reducing S&M expenses they move fast towards breakeven.

Because of the IPO drought, there is a roster of great tech startups ready for IPO. Instacart and Klaviyo should happen next week. But that is just a drop in the ocean; the current backlog is of at least 120 sizable VC-backed IPOs per year.

Conclusion

Technology is a secular trend, and we are at the dawn of a new super cycle GenAI-based.

Arm’s IPO was just a tasting – for comparison purposes, its market cap is already bigger than Vale’s and Suzano’s combined, the two Brazilian God-given natural resources champions.

The tech IPO window should reopen whenever interest rates move down.

Until then, the level of discounts in the US VC secondary market, accessible through Fabrica Ventures Fund, offers an opportunity of a lifetime.