2019 would have been the year for the largest US startup to debut and win a resounding victory in the stock market. However, things are not as they expected. The disappointing information about Uber, WeWork, Lyft made investors cautious “withdraw money” and be more alert.
Billionaire investors in Silicon Valley are all expecting “huge” sales of stocks that will make companies like Uber, Lyft and WeWork the next generation “giants.” However, things are not as they expected. Last week, WeWork delayed the IPO and the founder left the CEO position. Uber and Lyft issued shares earlier this year and prices are still sliding. On Thursday, Peloton also joined the list of “unicorns” to stumble, as stock prices fell on the first trading day. Therefore, investors are more cautious and step back, they realize that the overvalued companies have no prospect of profit in the future.
The attitude of investors is no longer salty, which threatens Silicon Valley’s support of building companies. This formula relies on the cash flow of venture capitalists to cover losses in the expectation that Wall Street investors will eventually buy stocks and make everyone rich. If mutual funds and pension funds no longer enthusiastically buy stocks when the company “goes public”, then fledgling companies cannot find initial funding.
Steven N. Kaplan, a professor of finance and entrepreneurship at the University of Chicago, said: “When the IPO market is negatively affected, the domino effect will occur with the valuation levels and investment agreements. dangerous. ” If that effect persists, start-ups will have a harder time raising capital, he added.
Most of the recent interest has been directed to WeWork. When starting to approach investors in the stock market, their losses of $ 1.37 billion in the first half of 2019 were “exposed”. Investors also questioned the financial arrangements of former CEO Adam Neumann and their accounting activities. As a result, Neumann left the CEO seat due to pressure from the board of directors and investors. At the moment, it is not certain when the company will return to the market.
Uber, meanwhile, lowered its price target in May. Still, its stock was down 30% as the losses continued to “deepen”. In the three months to June, ride-start-ups said they had lost more than $ 5 billion and recorded the slowest revenue growth ever. Opposition firm Lyft has dropped 40% since its IPO in March.
Fitness start-up Peloton also announced heavy losses in its business of selling high-end fitness bicycles and online classes. On the first day of trading last Thursday, Peloton’s shares fell 11% compared to the time of the IPO. Such a sharp decline is not uncommon for a newly listed company.
Not stopping there, many other companies also have to postpone their plans. Airbnb said last week that it had no intention of IPO until 2020, later than expected. Palantir Technologies, a data-mining firm backed by billionaire Peter Thiel, has not had an IPO schedule for years, because they may continue to raise capital from private investors. Close to revealing to NYT.
However, not every start-up “flinch” before such bad changes. Many smaller scale listings have been prospering. Besides big companies that are expected as much as Uber or WeWork, Pinterest is a pretty potential name. Shares of this company have increased 44% since listing in April.
Pinterest set their IPO price fairly cautiously, telling investors that they are about to make a profit and gradually reduce their losses in the months since the IPO. Moreover, revenue from advertising also increased rapidly. Rett Wallace, from Triton Reasearch, said: “Investors are spending money to buy futures, so helping companies paint the picture of the future. You can do it with Pinterest, but you can’t. do it with WeWork, Uber and Lyft. ”
Is this the root of frustration?
Seen in many ways, the current impasse between Wall Street and these startups comes from a problem, which is the valuation. Due to the expectations set by venture capitalists and the risks they face, companies are simply being asked too much.
Uber was valued at $ 72 billion by investors before the IPO, currently at a market capitalization of about $ 54 billion. Lyft, once valued at more than $ 15 billion, is currently valued at about $ 12 billion. As for WeWork, it reached $ 47 billion, when it was difficult to go to the IPO, executives and bank staff discussed lowering the valuation to $ 15 billion, but it was still not enough to raise the level. interest.
The market’s quick reaction to these companies was the exact opposite of the dot-com bubble 20 years ago. At that time, the start-up’s stock brought little revenue or bleak earnings prospects, like Webvan and Theglobe.com, soaring when it hit the floor.
Kathleen Smith, president of Renaissance Capital, said: “Everyone is concerned that this will be another bubble like in 1999 and 2000. However, investors are still very alert and cautious towards traders. this case. ”
Currently, the “judgment” from the stock market is that the trend of private investment has gone too far. With large amounts of cash, private investors have supported the hottest “startups” that have helped to set their valuations to the level of public investors (including central banks, sovereign wealth funds and funds). retirement) are not acceptable.
Fred Wilson, a partner at Union Square Ventures, said: “Things are getting a little chaotic. This moment could be a turning point for public market investors when it comes to getting start-ups. ups are highly priced and unprofitable. I think that’s very important for the private market. ”
Recent problems seem to have sprung up for a long time, which the biggest startups have encountered. With capital from venture capital and private investors, these companies are not required to go to the public market to seek funding like before.
Revenue growth will “offset” all weaknesses
But not everything is going smoothly. So far, the IPO market has allowed investors to pour money into relatively small and higher-risk companies, with the potential for rapid growth. Therefore, investors are willing to ignore many of their weaknesses. Three years after its founding in 1994, Amazon.com issued shares to the market, raising just US $ 62 million in a company valuation agreement with over US $ 400 million. Currently, Amazon’s market capitalization is more than 800 million USD.
In another case, Google was a larger and older company when it officially went public in 2004, valued at $ 23 billion – a huge deal at the time. However, they have delivered incredible profits, with an annual profit of more than $ 400 million per year when listed and still growing very fast.
Jeff James, who now manages more than $ 1.7 billion in assets at Driehaus Capital Management, said that the last part when talking about Google above is extremely important. “Growth is beyond expectations, which really ‘heals’ values and other weaknesses,” he said.