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Current IPOs are particularly risky – but we still need many more

Earlier this year, there were predictions that a giant wave of unicorn IPOs would smash records set at their height of the dot-com boom. What happened?

Earlier this year, there were predictions that a giant wave of unicorn IPOs would smash records set at their height of the dot-com boom. What happened?
Garry white employee

Garry White

in Features


Some believed that 2019 would set a new record for initial public offerings, with a whole range of ‘unicorns’ listing on public markets. With the total number of companies trading on stock exchanges falling since 1997, this would be a welcome move for all investors. But now the acceleration of the trade war may result in some businesses pausing for thought before they press the IPO trigger. However, questions remain over whether you would want to buy them anyway.

There is no guarantee that a so-called unicorn, defined as a private company that has been valued in excess of $1bn, will successfully float – whatever the hype surrounding the offer. The main risk for many of these businesses is the route to profitability. Of all the companies that listed last year, about 80pc were lossmaking. The last time companies with negative earnings made up such a high proportion of all IPOs was in 2000, just before the dot-com bubble burst.

Shrinking universe

The number of US businesses listed on its stock exchanges peaked in 1997 – the year Amazon first came to market. Since then, the number of companies listed has plunged by around half, leading some to dub stock markets “the incredible shrinking universe of stocks.” The main reason for the reduction in the number of listed companies is the rise of private equity and venture capital funding. Increasing regulation and reporting requirements for listed businesses also makes flotation less attractive because of the costs and management time that all of this involves. So, businesses are staying private for longer.

Earlier this year, there were predictions that a giant wave of unicorn IPOs would smash records set at their height of the dot-com boom. There were claims that new issues could raise a potential $100bn this year, surpassing the record set in 1999. However, geopolitical uncertainties and trade issues hit investor enthusiasm. As a result, the number of IPOs in the first three months of 2019 fell 41% year-on-year globally, with total proceeds raised falling 74% to $13.1bn, according to EY.

Of the four major unicorns listing so far this year – Lyft, Uber, Pinterest and Beyond Meat, two are certainly a success. Uber shares are still about 8% below their IPO price and Lyft is down a staggering 23%, but scrapbooking website Pinterest remains 33% above its flotation price and Beyond Meat is up a staggering 210% in a few weeks. However, the business case of the two successes remains unproven. Pinterest’s first earnings report as a listed company saw losses soaring more than Wall Street had expected and Beyond Meat’s valuation looks stratospheric considering there are many competitors likely to emerge. Should rival Impossible Burger float as expected in the coming months, the speculative frenzy that has driven gains in this plant-based meat group may come to an abrupt stop.

More to come

Unicorns that may float this year include work messaging app Slack, which is likely in the coming weeks. Rather than going down the route of a traditional IPO, Slack will sell existing shares in the company to the public in a direct listing. This cuts out investment banker fees, so shareholders save money. While still unprofitable, Slack generated $400m in revenue last year, up 82% from the year before. However, just 15p% of its customers actually paid for its service.

One makes a profit

Short-term property rental group Airbnb is also expected to list.  Unlike many unicorns, Airbnb actually makes a profit. However, there are questions over the long-term sustainability of its business model – and therefore its valuation. There has been increasing calls for regulation, as Airbnb doesn’t pay tourism taxes and competition is also mounting, with even global hotel chain Marriott International announcing it was moving into rival home-sharing services last month.

Perhaps the most under-the-radar group that is expected to float this year is Palantir – the data analytics company set up by PayPal founder and Donald Trump advisor Peter Thiel. It won a court case that allows it to bid for government contracts and is now believed to be worth more than $20bn. The business was initially funded by the CIA’s venture capital organisation, In-Q-Tel. Other planned flotations include financial services group Robinhood, courier company Postmates and office rental business WeWork.

What about the UK?

Of course, all of this relates to America, which is by far the most important market for technology. The UK is notoriously short of such companies, but there was an interesting sign of life in UK tech unicorns this week. TransferWise, the money wire company that’s aims to rival Western Union, was valued at $3.5bn after a new round of private funding, making it Europe’s most valuable financial technology start-up. However, TransferWise didn’t raise new money to bolster its balance sheet, but used the process to give employees and early-stage investors the opportunity to bank some of their early gains. Disappointingly, this implies that an IPO will be unlikely for quite some time.  However, we have had confirmation that Trainline, the lossmaking rail ticketing app, plans a £1.5bn London listing and Watches of Switzerland also plans to float with a valuation of almost £700m.

Of course the success of unicorn IPOs depends on the valuation when these companies come to market. However, it appears that bankers drastically over-valued Lyft and seriously underpriced Beyond Meat. If investment bankers are having problems getting their valuations right, private investors need to take even more care.

A version of this article appeared in Friday’s Daily Telegraph.

Nothing on this website should be construed as personal advice based on your circumstances. No news or research item is a personal recommendation to deal.

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