Reminiscent of the hubris leading up to the 2000 dot com crash, the start of this year there has seen a queue of internet unicorns lining up to launch on the stock market via Initial Public Offerings (IPOs).
A unicorn business is defined as a private, venture capital-backed firm worth over $1bn. Among those that have either launched IPOs or considering them are Lyft (launched in March), Uber (launched in early May), Pinterest, AirBnB and possibly We Work and Slack.
So far, the results have been distinctly underwhelming with Lyft’s shares valued at $72 each on debut, giving the seven year-old company and rival to Uber a market value of slightly more than $24bn.
Uber set its launch value at $90 billion (£70 billion) and listed share prices at $45 each. However, within hours on its first day of trading Uber’s share value had dropped by 7.6% down to $41.51.
Neither of the two ride-hailing businesses has so far ever made a profit.
Last year, despite boasting revenues of $11bn Uber made operating losses of $3bn and while its revenues grew from $343m to $2.1bn between 2016 and 2018, its losses also soared, from $682m to $911m.
The hubris might best be justified by the fact that We Work was valued at ~$20bn at last fundraising, despite last year losing ~$4bn. Contrast this with UK listed Regus that made ~€800m last year and is currently valued at ~$4bn.
There is no doubt that trading conditions in the last two years have been challenging, with a global economic downturn, trade wars and political populist movements all making markets more volatile.
This may be behind the incentive for unicorns to rush into IPOs before economies find themselves in recession. Again, readers might like to recall the market bubble ahead of the dot com crash in 2000 when Lastminute.com was the last of old “retail” internet firms to list before the crash with many of those who missed the boat subsequently falling by the wayside.
Are there more deep-seated problems with internet unicorns?
Ilya Strebulaev, professor of finance at Stanford University, has extensively researched private venture capital backed companies and come to the conclusion that unicorns are overvalued by about 50%.
Prof Strebulaev argues that typically venture capital-backed businesses make losses “because they basically sacrifice profits to achieve very high growth or scale” but the question is whether their business models will be sufficiently flexible to allow them to convert losses to profits over time.
The current crop of internet unicorns are significantly larger than the internet companies that were involved in the mid-1990s dot com bubble and 2000 crash but a lot depends on their plans for the future.
Lyft has plans for using the money generated from its IPO to invest in acquisitions and technology, including autonomous driving, for example.
Uber has already suffered from protests by its drivers over their treatment with stories rife of drivers earning so little that they have to sleep in their vehicles and with protests ongoing there are concerns that it would face significantly increased costs if forced by regulators to classify drivers as employees rather than contractors.
An item in its IPO prospectus is particularly telling “as we aim to reduce driver incentives to improve our financial performance, we expect driver dissatisfaction will generally increase.”
If these companies are pinning their hopes of future profitability on driverless cars and dispensing with drivers altogether they, and their investors may have a long wait.