Why Instacart Recently Slashed Its Valuation

Privately owned grocery delivery and pick-up company Instacart recently announced it would lower its valuation in light of the recent correction in technology and growth stocks.

In this clip from "The M&A Show" on Motley Fool Live, recorded on March 25, Motley Fool contributor Travis Hoium discusses what Instacart's announcement means for the company, its employees, and its prospects of going public this year. 

Travis Hoium: The news here is that Instacart has decided to lower their valuation by about 40% to $24 billion. In March of 2021, so just a year ago, they raised $265 million at a $39 billion valuation. This happened in part because a company like DoorDash was doing really well on public markets. When you go out as a private company to raise money, that's one of your comparisons that you use, what are public stocks trading for? The thought at the time was that this was going to be one of the big IPOs in 2022. Well, since then, we've had a meltdown in the tech space and in this growth space, growth stock space. Their valuation needs to adjust at some point, whether that's when they go public or sometime before that and what they said is that they're lowering their valuation in part because they're looking to hire talent and if they're going to try to give them stock options or restricted stock at a valuation that is nowhere near what they would get on public markets today, that's not going to be tenable for them.

It sounds like this wasn't tied to any fundraising round. They have about $1 billion on the balance sheet. But basically the board of directors said, hey, we will allow you to offer stock at a far lower price or options at a far lower price than our last fundraising round. Now, this is interesting for a couple of reasons. One is, I think when you look at stocks like Uber and DoorDash, this really seems like a winner-take-all market to me. Like these either become the go-to apps that you use for your groceries and your food delivery and getting picked up if you're using an Uber.

Jason Hall: It's the scale, Travis?

Hoium: It's all about scale. DoorDash made an acquisition last year that was about scale internationally. You're building the technology stack. You want to use that not just in the U.S., you want to use it everywhere. You don't want to just use it for fast food restaurants, you want to use it for groceries, you want to use it for convenience stores. You want to be able to scale on multiple layers. There's this arms race basically and if you're not winning the arms race, you're in real trouble. Instacart as a private company, likely needs to raise money again in the future. Their idea, I think, was that they were going to go public. That may not be in the cards, but if it is, it might be at a lower valuation, which then has knock-on effects to employees who were granted stock options at a higher valuation even the shareholders that do exist. Typically when you raise money as a private company, you do it with preferred stock. It effectively acts as debt and if you do a down round that money has to come from somewhere like the last investor in is not going to lose money on those deals. There's just a bunch of knock-on effects here. I'll maybe leave it there in and throw it to you guys. But I think there's so many interesting dynamics here from an employee standpoint, from the capital market standpoint.

Then at the end of the day, I think we're going to see a lot of acquisitions of companies that were flying high at some point and just ran into a buzzsaw and in these market valuations dropping and at some point if you're an Instacart, you go, OK, if we think there's going to be five major players in this delivery market and we're not going to be one of them, we got to figure out what to do. I think this could be a sign that and we've been hearing rumblings about this for a while that tech companies that were raising at these astronomical valuations in private markets may have shot themselves in the foot in a way. There's going to have to be adjustments here from employees, from investors. A lot of strange dynamics going on here. I know this is a private company, but there is going to be an impact on public companies, whether that's through acquisitions or through being in a better financial position to hire talent.