September has seen several IPO debuts, including Arm Holdings (ARM), Instacart (CART), and Klaviyo (KVYO). But what does this mean for the future of the IPO market? Byron Deeter, Bessemer Venture Partners, Partner, joins Yahoo Finance Live to discuss the IPO market.

"We’ve definitely seen investor appetite move more towards short-term earnings... They want to see shorter payback periods. They want to see this tradeoff from growth at all costs over to efficient growth," Deeter explains.

On IPO valuations, Deeter says, "I do think there have to be some reset expectations as the private multiples come down to meet the public multiples and companies that want to make that transition have to adjust."

For more expert insight and the latest market action, click here to watch this full episode of Yahoo Finance Live.

Video Transcript

AKIKO FUJITA: Byron, you could argue at least in the public markets, investors have become a little more discriminatory. Yes, they like the high-growth companies. But they also want to see a very clear path to profitability. When you consider where these companies-- we're talking specifically about names like Klaviyo as well as Instacart, where they have performed at least in the initial days-- and you look at who's lining up on the sidelines on the private side of things, you think there's enough companies that are ready to test the market with investors-- with investor expectations where they are?

BYRON DEETER: So I think that's a key question as we've definitely seen investor appetite move more towards short-term earnings. And it's a rational response. Rising interest rates causes an increased cost of capital. They want to see shorter payback periods. They want to see this trade-off from growth at all costs over to efficient growth.

And that's why it took a high-quality company like Klaviyo to open the market on the software side. They're growing at over 50%. But they're also generating 8% free cash flow. And so it's a very efficient growth model. To get to over $650 million of annual recurring revenue, they only burn $15 million over their entire life cycle. And so that's the type of company that the buy side was waiting to open the market.

And I think you're right that we're going to see companies that are free cash flow positive or very close to break even that are going to start to test the waters next. And then as that buy side starts to move more towards greed, I do think we're going to see companies that are in the hypergrowth mode and burning a few bucks that'll probably test the water middle of next year. But it's going to be an efficient mindset. And it's going to be a subset of those 300-plus companies that are in the queue that will probably push to the front with that efficient mindset.

AKIKO FUJITA: Byron, when you look specifically at Instacart's debut, there was a lot made about, you know, where they were in their last private funding round valued at roughly $39 billion versus where they debuted in the market roughly $9 billion. Is the expectation here m matching now increasingly? In other words, these companies that are still private, are they expecting largely to maybe have to take a bit of a cut in valuation in order to test the public markets?

BYRON DEETER: So that's a dance that's going on. And I do think there have to be some reset expectations as the private multiples come down to meet the public multiples. And companies that want to make that transition have to adjust. Obviously, a lot of the private companies are growing into these compressed multiples. And an absolute case may grow back into those valuations. And that's what a lot of them are hoping to do.

But we do expect to see more of the Instacart-like financings, which are great outcomes in an absolute sense, $10 billion-plus values. And yet, the investors have to absorb some valuation compression just like the public investors did. We all saw these numbers come down meaningfully over the last two years, where public multiples compressed by 50% or more. And so it's quite logical that the private companies will have to endure some of that as well as they make this transition to public life.