Looking back at the past year at the stock market, it was a time of “unicorns” – companies that were valued at more than one billion US Dollars at the time of their IPO. 2019 saw a particular surge of unicorns going public, including Airbnb, Dropbox, and Spotify. Around one-third of all American IPOs of 2019 were unicorns.
Expectations ran high, but it soon turned out that a company’s high valuation does not necessarily translate to public market success. One of the most glaring examples of this was Uber. Prior to going public, the mobility service collected $14B in venture capital. However, on the day of the IPO in May, Uber had to significantly lower the price for its shares. It raised $8B in its IPO, but the stock lost around 20 percent of value on its first day of trading. Although it is now recovering and nearing its value from the IPO, investors went through rough patches. At the beginning of 2020, Uber stock was valued around 20 percent lower than the initial offering.
Lyft, another mobility service, did not fare much better. Although the company had collected $5B, and an additional $2.3B through the IPO, its stock plummeted. Its value is now around 34 percent lower than the initial price.
In the bigger picture, the public market fate of these two companies, though unfortunate for their investors, is symptomatic for a larger tendency. A closer look reveals a surprising correlation: Companies whose stock offered the best returns had collected significantly less capital pre-IPO than those whose stock quickly lost value. Companies trading below their IPO had collected an average of $774M. With an average of $209M, companies thriving on the public market had only collected a third as much.
There has been a general inclination among startups to delay their IPO, considerably, compared to previous decades, which partially explains the influx of unicorns. However, when companies hold back for too long, having collected more than $250M in capital, they are now increasingly suspected of losing too much money and not operating profitably, especially in terms of unit economics. Although this may not always be the case, it has been my experience that, in the interim, such companies often establish internal processes that work fine for private companies but are less than ideal for public ones. Changing these processes can be difficult later on and even more challenging the longer the IPO has been delayed. The public market mandates discipline, especially regarding unit economics and management.
Meanwhile, we are observing that venture capital is becoming more diversified, which impacts the types of companies that are going public. VC firms increasingly back startups outside of software and consumer technology sectors. Though software is still a major driver in terms of deal size, the overall number of deals is declining. Industries such as healthcare systems and services are benefitting.
In terms of the numbers of deals, the fastest growing sector is healthcare, and it may be one of few growth sectors in the coming years due to many driving factors including concerns over global pandemics, a continuous demand for advanced medical solutions, an aging population in developed countries ( leading to higher rates of diseases such as cancer), growing demand of sophisticated, surgical robots, and advancements in AI-supported early disease detection.
Among those profiting from a more diversified approach to venture capital are a number of startups offering commercial services, and the range of services spans diverse areas, from accounting and training to real estate. The real estate category also includes WeWork. Aside from its disastrous IPO, WeWork brought significant money flow to its industry sector.
In the past, investors expected companies to become profitable within approximately 18 months after their IPO. In favor of rapid growth, they were willing to look past net losses, in the meantime. However, the past months show that investors are becoming pickier and less willing to support companies that are losing too much money.
Within the next months, we will see if the trend of startups going public earlier on will return or whether more over-valued unicorns will enter the public market despite high net losses.