Wall Street pokes at start-up bubble as IPO dreams fizzle out

Billionaire Silicon Valley investors, sneaker-clad founders and button-down bankers all expected enormous stock sales to turn companies like Uber, Lyft into a new generation of corporate giants

This was supposed to be the year when the US’ biggest start-ups would finally make their triumphant debut on the stock market. Billionaire Silicon Valley investors, sneaker-clad founders and button-down bankers all expected enormous stock sales to turn companies like Uber, Lyft and WeWork into a new generation of corporate giants.

It hasn’t quite turned out that way. Last week, WeWork postponed its planned initial public offering. Uber and Lyft sold shares earlier this year only to see their prices collapse. On Thursday, Peloton joined the list as its shares slumped in their first day of trading. Investors took a look and backed away, seeing overpriced companies with no prospect of making money any time soon, in some cases led by untested executives.

The rejection threatens Silicon Valley’s favoured approach to building firms. The formula relies on gobs of money from venture capitalists to paper over losses with the expectation that Wall Street investors will eventually buy shares and make everybody rich. If mutual funds and pension funds are no longer willing to buy once the firms go public, fledgling entities are unlikely to find funding in the first place. “When the IPO market is hurting, it has a domino effect on valuations and venture capital deals,” said Steven Kaplan, professor (finance & entrepreneurship), University of Chicago. If it persists, that could make it harder for start-ups to raise money, he said.

Much of the recent concern has been directed at WeWork, a shared office space company based in New York. As it began to approach stock market investors, the company revealed losses of $1.37 billion in H12019. Investors also questioned financial dealings of WeWork’s chief executive, Adam Neumann, and the company’s accounting.

On Tuesday, Neumann stepped down under pressure from directors and investors. It is now uncertain when the company will return to the market.

Shares of rival Lyft have fallen 40 per cent since the company’s debut in March.

The fitness start-up Peloton has also reported deep losses on its business of selling high-end exercise bikes and live-streaming classes into users’ homes. On the stock’s first day of trading Thursday, it ended 11 per cent lower than its IPO price. 

“It’s becoming a tough time to go public, there’s no question,” said John Foley, chief executive of Peloton. “I’m happy we got out, but I think it’s going to get pretty tight.” Other firms have delayed their plans. 

Airbnb said last week that it did not plan to go public until 2020, later than expected. Palantir Technologies, the data mining firm the billionaire investor Peter Thiel helped found, now does not expect to go public for years as it can continue to raise money from private investors, two people familiar with its plans said.

Not every prominent offering has floundered. Many smaller listings have soared. Among the larger ones is the online pinboard company Pinterest. Its shares are up 44 per cent since it went public in April. But Pinterest priced its IPO conservatively, told investors that it was close to profitability, and narrowed its losses in the months since it became publicly traded. And the company is increasing revenue — which comes from advertising — fast.

“Investors are buying the future, so help them pencil out the future,” said Rett Wallace, whose firm, Triton Research, analyzes tech companies that are going public. “You can do that with Pinterest. You can’t do that with WeWork. You can’t do that with Uber or Lyft either.”

Charles Kantor, senior portfolio manager at Neuberger Berman responsible for managing more than $5 billion, said he asks a few simple questions when considering an IPO investments, including: can a company’s profit margins hold up, what kind of competition does it face, and can executives be counted on?

“The ones that we pass on, we don’t feel comfortable with the answers that we get,” said Mr. Kantor. He did not invest in Uber or Lyft, or Pinterest, for that matter. But he did buy shares of the online pet store Chewy, which went public in June. He said its profit margins, a large potential market, and solid executive team were all reasons he was persuaded to buy.

In many ways, the current standoff between Wall Street and these giant start-ups comes down to a simple issue: price.

Because of expectations set by VCs, given the risks they face, the companies simply asked for too much.

Uber, which private investors valued at roughly $72 billion before its IPO, is now worth $54 billion in the public market. Lyft, once said to be worth more than 

$15 billion as a private company, now has a market cap of roughly $12 billion.

WeWork was last valued at $47 billion in the “late stage” market of mature private firms. In the run-up to its failed attempt to list shares, executives and bankers had discussed slashing the valuation to $15 billion — but were still unable to gin up enough interest.

The tepid response to these entities stands in stark contrast to the dot-com bubble of 20 years ago, when shares of start-ups with little revenue or prospects for profit — like Webvan and Theglobe.com — were greedily bid up in their market debuts.

“Everyone feared this would be another bubble like in 1999 and 2000,” said Kathleen Smith, principal at Renaissance Capital, which provides research on IPOs and manages ETFs that track their performance.  Now, the verdict from the stock market is that it’s the private investment binge that has gone too far. With a flood of cash, private investors backing the hottest start-ups have inflated their valuations to a point that public investors cannot tolerate.

“Things have gone a bit nutty,” said Fred Wilson, a partner at Union Square Ventures, a New York based tech investor. This moment could be a turning point in what public market investors will accept from highly valued, money-losing start-ups, he said.

“I think that’s very important for private markets,” Mr. Wilson said.

The recent troubles may stem from the long incubation period the largest start-ups have had. Flush with funding from VCs and other private investors, the firms have not been forced to go to the public markets to secure financing like they might have in the past.

©2019 The New York Times News Service