Have you been in touch with the world of business news lately? Especially news about start-ups.
Do you follow the ups and downs of some prominent start-ups? Start-ups with bright ideas that became unicorns as fast as a pot of hot milk raising up to the brim.
According to Investopedia, “An initial public offering (IPO) refers to the process of offering shares of a private corporation to the public in a new stock issuance. Public share issuance allows a company to raise capital from public investors.”
In the past 6 months or so, there have been few IPOs by interesting start-ups. All these IPOs have created quite a buzz and were looked forward to as the biggest tech IPOs since Facebook and Alibaba. They did stir up some debate-worthy morning news when they went public. But all was not smooth as silk. Wall Street experts and investors have had their own takes on these IPOs and some are asking “Was it too soon to shell out shares?”.
According to the books, investors expect some stability, financial sustenance and steady profits before they invest in a company that is going public. That hasn’t been the case with these start-ups exactly. The uncertainty in the future growth of these companies because of unproven business models has left the investors and in some cases, even the CEOs of the companies itself worried!
Notably, the prominent start-ups which started to float were Uber, Lyft, Pinterest, Zoom, and Slack and WeWork might just go public this year. Hospitality services provider, Airbnb has got cold feet and might push its much-awaited IPO to 2020.
So what’s up with these IPOs?
Here are a few interesting companies that made headlines this year:
Lyft, a raid-hailing start-up like Uber raced ahead of its bigger competitor (Uber again) to file for IPO in March 2019 and was the first big start-up to go public this year. The company which claimed to have had 39% market share in the USA in December 2018 hasn’t aced the first 5-6 months since its IPO.
Lyft proceeded with its rocky IPO even though it suffered a loss of $911.3 million in 2018 while at the same time making double the revenue — $2.2 billion- compared to 2017. Lyft shares opened at $72/share and rose to $78.2/share to give a valuation of $26.6 billion at the end of the first day of trading. Almost one and half months later, after Lyft announced its losses for the March quarter, the shares dropped by 27% valuing the company at just about $15 billion. As of September first week, Lyft has gone down a lot and is trading at somewhere around $45/share.
Lyft’s slump just after 1 month had put a lot of pressure on Uber before its IPO as it was also suffering terrible losses which led to investors losing faith in ride-sharing businesses.
Uber was valued at a whopping $120 billion in October 2018. When the company went public in May 2019, it was valued at about $75 billion pricing a share at $45. The valuation dropped 38% and the reason for that would be the wobbly stock prices of Lyft which made the investors doubt as both the companies have the same business model.
For the second quarter of 2019, Uber reported a staggering loss of $5.2 billion which raises a huge red flag in Wall Street for a company that just went public. According to Bloomberg though, “It’s a routine cost for new public companies and investors are likely to forgive it as one-off”. As of September, Uber has been averaging at around $33 a share.
Uber CEO, Dara Khosrowshahi said 2019 will be the company’s “peak investment year” and that losses should come down in 2020 and 2021. He added that he’s certain “the business will eventually be a break-even and profitable business.”
Lyft’s revenue and customer base is growing year on year but is still far away from making a profit as a large portion of the revenue goes to its drivers. That is why Uber and Lyft are eyeing at automation and self-driving cars to increase their profit margin. In reality, self-driving cars taking over the roads majorly is pretty far away in the future.
For the next two years only the quarterly revenue of Uber and Lyft will drive their growth and we can safely ignore any ups and downs that might occur due to some technological change like self-driving cars and things.
Zoom Video Communications was another bullish start-up to go public along with social media web, Pinterest, during the second quarter of 2019. Unlike, Uber and Lyft which are cash burners, Zoom is one start-up that is profitable after doubling its sales for the year 2018. Zoom priced its shares at $36 on the first day and to the CEO’s bemusement, the shares zoomed 72% to close at $62 at the end of the first day of trading valuing the company at $9 billion. The stocks continued to rise within a tidy 5–6% margin for the following two weeks in April. Zoom’s stock is still going strong in September trading at about $78.
Pinterest started trading on the same day as Zoom Video Communications. Priced at $19 apiece, Pinterest piqued a lot of investor’s interest to shin up 28.4% to end at $24.4 apiece and helped bump the company’s valuation up well above $12 billion from the initial $10 billion.
A sassy software start-up called Slack Technologies which provides cloud-based tools went public in the month of June. Slack Technologies quickly attracted a lot of Silicon Valley investors during the early stages of the company. It started to trade at $38.5 a share valuing the company at $24 billion. Currently, after almost 3 months, Slack is trading down at $26 a share.
The problem with Slack is the same as with any other small tech company — competition from bigger companies. Sassy as the company is, but the software product of Slack is not snappy enough to fight against Microsoft. Investors are worried that Slack Technologies will not have what it takes to trounce bigger software companies. The second-quarter loss for 2019 was $360m, more than 10 times the loss a year ago. The company itself said that the company’s losses will “significantly increase” over the next few years. This kind of uncertainty raises a lot of eyebrows.
The last but not the least.
It’s WeWork. The American real estate company that provides shared workspaces for technology start-ups. And boy, this one is getting trampled even before it goes public. The company was scheduled to go public next week but the most recent news on Sept 17th says WeWork will delay its IPOs as it has struggled to attract investors and the negative vibe around this year’s “startups-going-public-spree” has taken a jab at WeWork’s credibility.
For a start, WeWork was valued at $47 billion after its fundraising during the start of this year but while filing for IPO executives happened to say that the company is worth just a little above $15 billion. WeWork also joins Uber’s and Lyft’s loss-making bandwagon as its losses last year were $1.6 billion almost equaling its revenue of $1.8 billion. Investors are skeptical about WeWork’s business model which revolves around leasing buildings to other companies as workspaces.
WeWork’s lease obligations stand at $47.2 billion but only $3.4 billion worth of space is leased to its clients. The path to WeWork’s profitability is unclear. In the wake of an economic downturn, freelancers and smaller start-ups might just stop leasing workspaces while WeWork still has to pay for them because of lengthy contracts. Also, the business model of WeWork is easily replicable by anyone with deep pockets; buy/lease a property, embellish the interiors and lease it out again.
Scott Galloway of NYU Stern School of Business said “If the company doesn’t make sense, it is usually not a good stock to own. Neither Uber nor WeWork in their current structure makes any economic sense as standalone companies.”
WeWork is stuck in a deadlock now. The IPO is important for the company as raising about $3 billion through IPO could secure a $6 billion commitment from banks. At the same time, not going public and closing the enormous gap between the currently leased places and un-leased places to stabilize the financial situation would gain the trust of investors. The trust of investors will set a tone for future IPO.
The issue for raising money through IPO could be solved if SoftBank, WeWork’s major investor, is willing to pump in money single-handedly, but Soft bank is reluctant to do so as it has already put in $10.6 billion. Soft bank now is planning to push the IPO to 2020 amid the row regarding WeWork’s business model.
So what does this all say?
This year so far has seen plenty of IPOs including the ones mentioned here and other smaller ones too. There are a lot of different reasons to justify how these companies are performing right now. Investors have begun to question the rising costs of business models and whether or not they can achieve sustainable profits. While bigger companies are struggling to keep their heads above water, smaller companies like Pinterest and Zoom are doing very well for their own good. It could also be attributed to the fact that they are the ones closer to profitability.
News agencies lashed out during the IPOs of Zoom and Pinterest saying they are way overpriced but those companies are still holding on to their big gains in stock price even after almost 6 months compared to what bigger start-ups namely, Uber and Lyft, have struggled to maintain. Uber, Lyft, and WeWork are companies that ball with big piles of cash in contrast to other start-ups but Zoom and Pinterest are financially healthier on paper than those two.
Financial health attracts investors; it makes them trust a company more.
Zoom Video Communications CEO, Eric Yuan said, “Everything we did was just frugal, the company doesn’t just spend money to create a buzz.”
On top of all expert says and takes there is one thing that nobody grasps completely. These start-ups have almost beaten every traditional method of doing business, have raised crazy amounts of money for their business and carry impressive valuations.
Expert investors and analysts haven’t been always correct whenever they have tried to predict these kinds of start-ups. These start-ups have jiggled the economy up quite well and have made headlines in many aspects — work culture, fundraising techniques, employee benefits, customer satisfaction, employee scandals, top-level management issues, attrition rates, etc. Some of these headlines have given them headaches and gloomy days but some have also propelled them to be where they are today.
Everyone is learning to swim without a trainer. We will have to wait this one out.
Where do you think this will lead to? Share your opinion down here.