• Jason Trueblood

Underperforming IPOs Downing VC Returns

Traditionally, the initial public offering (IPO) has been the holy grail of venture capital investing as the markets can grant investors portfolio some liquidity or potentially even higher returns.  For venture capital investors in Facebook, Apple, Amazon and many more, the returns generated in the public market have been far higher than any returns they could have imagined in the private markets.  In previous months this has started to shift and the markets have not been kind to technology startups who have recently launched IPOs.

  • Uber - Launched their IPO on May 10th of 2019 with a price per share of $41.57.  In the months following the IPO, Uber’s stock price fell to $29.72.

  • Slack - Launched their IPO on June 20th of 2019 at a price per share of $38.62.  Since the IPO, the stock price dropped to $23.43.

  • Upwork - IPO’ed on October 5th of 2018 with an initial price per share of $20.99.  In the year following the stock has slid down to a current trading price of $12.26 per share.

  • Lyft - Initial IPO on March 29th of 2019 at $78.29 per share.  Since the IPO the stock has dropped to $39.52 per share.

  • Peloton - Launched their IPO at $29 per share in September of 2019 and the stock is currently trading at $23.05.

Lately, Uber’s stock has fallen to an all time low after discouraging Q2 results driven by a $5.2 Billion loss hitting the books, yes, that's Billion... with a “B”.  While Uber has been recognized as one of the most innovative companies of our time, the fact still remains that the company is not close to profitability.

In addition, California passed AB-5 to crack down on the gig economy, which will impact Uber, Lyft, Upwork and other gig economy startups by forcing them to classify their contractors as employees. Now Uber’s drivers will be able to unionize, earn a mandatory $12 minimum wage, receive overtime pay and other benefits that independent contractors don’t have rights to.  With California being one of the largest markets for Uber and Lyft, this legislation could cause their stock price to drop to even further lows.

In the case of Peloton, the IPO is so new that it's hard to see what's caused the company’s stock to drop.  Could it be that investors are skeptical as a result of other poor performing companies? We may need to give Peloton a couple months to get their footing before giving them a more detailed evaluation.  That said, the company is reporting losses of $245 Million in their 2019 fiscal year.

Another theme that is playing out in the market is investors shift to less volatile markets as a form of protection, which means there is less capital in the market to invest in new publicly traded companies like Uber, Lyft, Peloton, etc.  With less capital in the market, investors could likely lean away from unprofitable companies like Uber and choose to invest their capital in more conservative investments.

All things considered, time will be the judge for young and innovative companies entering the public domain.  Although recent dips in share price could potentially lead to large returns for early investors, companies must stay true to the innovative path that got them to an IPO in the first place.  For venture capitalists with large stakes in these underperforming technology companies, it will be interesting to see if their investment strategy shifts, or if they choose to ride out the storm to see what lays on the other side.

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