Lyft’s IPO marked an exciting day for the company and its investors. Lyft shares closed 8% above its IPO price on the first day of trading, reflecting thestrong demand by institutional investors for high-growth unicorns and the ride-sharing sector in particular. Only time will tell how the stock will perform in the long run, but what public investors are betting on is that the company will grow out of its losses and disrupt the over $1 trillion car ownership market.
Implicit in Lyft’s first-day trading is that investors are hoping the company’s shares will perform as well as they did when the company was private. If you go back to Lyft’s early days as a startup, the price per share has increased over 350x. While there are liquidation preferences specific to each share class that affect an investor’s return, there is no question the appreciation in the company’s value is enormous. It’s the reason institutional investors and accredited investors alike want access to the private tech company asset class.
This appreciation is the reward for taking on significant risk. VCs who back these companies are frequently putting material amounts of capital at risk. They do so with the full understanding that the “companies” – often, there’s nothing more than an idea and an eager entrepreneur when investors jump in – may not materialize into giants. Lyft is great success, but there are far more busts for every Lyft.
The growing popularity of secondary market trading for these shares provides earlier stage investors with an opportunity to get in and out of shares before an IPO. Liquidity providers such as SharesPost, which has executed nearly $5 billion in trades in more than 250 companies since 2009, are helping investors access this market and realize the potentially outsized gains in companies in hyper growth mode.
Secondary trading typically occurs in the later stages of a private company’s development, but there is still significant growth potential for these firms. Lyft’s shares jumped 65% per share from its last private funding round in June 2018 to the stock’s close on the first day of trading on March 29, 2019.
Lyft’s IPO marked its graduation from the unicorn club. Others will soon follow -Pinterest, Uber, Postmates, and Slack. By all accounts, Lyft’s IPO demonstrated investors are eager to own a part of these dynamic, high-growth companies. We’ll be closely monitoring these companies as they march towards their IPO.
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Investing in private company securities is not suitable for all investors. An investment in private company securities is highly speculative, involving a high degree of risk, and investors should be prepared to withstand a total loss of your investment. Private company securities are also highly illiquid and there is no guarantee that a market will develop for such securities. Each investment also carries its own specific risks and investors should conduct their own, independent due diligence regarding the investment, including obtaining additional information about the company, opinions, financial projections and legal or investment advice.
Accordingly, investing in private company securities is appropriate only for those investors who can tolerate a high degree of risk and do not require a liquid investment.
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