Sequoia Capital and Andreessen Horowitz, two prominent venture firms in Silicon Valley, are facing significant losses on their recent investment in Instacart, a grocery delivery company. The deal closed in 2021 when tech stocks were thriving.
In Instacart’s updated IPO prospectus, filed on Friday, the company announced its plan to sell shares at $28 to $30 each, valuing the company at around $10 billion at the highest end of the range.
This valuation is more than 75% lower than what Sequoia and Andreessen initially invested in early 2021. Back then, Instacart sold shares at $125 each, giving the company a valuation of $39 billion. At that time, the delivery industry was booming due to Covid shutdowns, and Instacart experienced record demand for its services.
Instacart’s finance chief, Nick Giovanni, commented, “This past year ushered in a new normal, changing the way people shop for groceries and goods,” in a press release at the time.
However, in the years following, Instacart and its investors realized that the growth during that period was far from normal. Instacart experienced a 200% surge in revenue in one quarter and sales increased almost seven times in the quarter before. The company announced plans to expand its workforce by 50% and invest more in advertising.
Mike Moritz from Sequoia, who led the investment and recently announced his departure after 38 years, said in the same press release that Instacart was “fulfilling its role as a vital service for consumers, a reliable partner for retailers, and an effective platform for advertisers.” Others, including Fidelity, T. Rowe Price, and D1 Capital Partners, also participated in the financing round.
However, with the reopening of the economy, inflation spikes, and the Federal Reserve increasing interest rates, consumers started reverting to in-person shopping on tighter budgets. Investors began demanding cash-burning companies to find a path to profitability. Last year, the Nasdaq experienced its biggest drop since the 2008 financial crisis.
Venture firms have also experienced a lack of returns from IPOs since the 2022 market collapse. This is significant because VCs invested substantial capital in 2020 and 2021, including high-valued deals in crypto and fintech.
Despite changing market conditions, Instacart has continued its growth, albeit at a significantly slower pace. Its revenue increased by 15% in the latest quarter compared to the previous year, and operating expenses have decreased, allowing the company to turn profitable.
The larger concern from a valuation perspective is that Instacart’s $39 billion fundraising round occurred during a period of record tech IPOs and just after the successful offerings of fellow sharing-economy companies Airbnb and DoorDash.
Since late 2021, there hasn’t been a noteworthy venture-backed tech IPO in the US, with only Instacart and Klaviyo recently filing to go public. While car-sharing service Turo has also filed, its initial prospectus was released in early 2022.
Fortunately for Sequoia and Andreessen, they invested in Instacart at a much lower stock price in the company’s early days. Assuming the stock price remains stable, there is still a significant opportunity for limited partners to make money. However, due to the lock-up period, the firms cannot start selling their shares until 180 days after the offering.
Sequoia holds the largest stake in Instacart, fully diluted to 15%. The 400,000 shares purchased in 2021 are just a small portion of the 51.2 million shares it owns. Overall, Sequoia has invested approximately $300 million for a stake that could be worth over $1.5 billion at the highest valuation.
Sequoia led Instacart’s Series A round in 2013 with an $8.5 million investment when the share price was only 24 cents. Andreessen led the subsequent round at $2.98, and both firms participated in the Series C and Series D rounds at $13.31 and $18.52 per share, respectively.
As Andreessen’s total ownership is below 5%, its full stake is not disclosed in the prospectus.
Representatives from Sequoia and Andreessen declined to comment on the matter.
It was not until 2020 that Instacart’s share price reached its current level following a $200 million round led by Valiant Peregrine Fund and D1. Neither Sequoia nor Andreessen participated in that round.
Even if Instacart’s IPO cannot bring its valuation near its peak during the Covid era, venture firms such as Sequoia and Andreessen are likely hoping it will revive public investor enthusiasm for new tech stocks. Arm, for example, reentered the public market on Thursday and saw a 25% increase in its debut.
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