The past week has been fraught with headlines suggesting Uber’s lackluster IPO is proof that the IPO market has passed its peak. Broadly, the narrative has been that Uber’s IPO performance suggests that most unicorns are typically overvalued by the time they go public, despite the company having raised $8 billion in its offering. We would posit that this narrative is at best overstated and at worst premature.
Year-to-date, 2019 has been a blockbuster year for late-stage VC-backed company IPOs. This year, we’ve seen seven companies that priced their IPOs with a cumulative valuation over $123 billion. Specifically, our tracking criteria is formerly VC-backed, U.S. headquartered companies with publicly available preferred share prices that listed on US exchanges. Most recently we saw Uber’s historic IPO that, by most all metrics, was a disappointment. In our view, Uber’s early performance may not be indicative of future performance, yet the few days trading on public markets has produced strong criticisms by venture ecosystem-company critics. To determine if data tracks this hypothesis, we analyzed IPOs with the above-listed criteria since June 1, 2018.
The subset of companies has appreciated in value an average of 67 percent and a median of 29 percent from IPO pricing. It appears public investors are not broadly concluding these often loss-generating companies are overvalued, but are instead weighing their investment considerations on the individual merits of the companies and the strong growth prospects they possess. Of course, we can’t turn a blind eye to the fact that the two largest IPOs of the past twelve months, Uber and Lyft, appear on the bottom half of the chart. However, it is no coincidence that these two companies operate in the same, very specific sector. Perhaps their poor performance is not necessarily indicative of investors’ appetite for unicorn companies, but instead is telling of the work the ridesharing industry has left to do to win over public investors. After all, Lyft and Uber came to public markets with a combined $4 billion in losses last year.
Almost equally important to consider is how share prices for this set of companies have changed since they were still private. The abundance of available venture capital funding has created an environment where companies are able to stay private longer, as they attempt to disrupt or create new markets. This environment has helped fuel the rise of secondary markets, as employees and early investors look for avenues to realize the gains they have achieved. Below we show how share prices for the same subset of companies have changed from each of their last private financing round to market close May 17th. We acknowledge that for every company that makes it to this stage of development, there are many more that failed. That said, the percentages below help illustrate why this asset class has garnered so much attention and brought the rise of deep-pocketed investors like SoftBank.
We’re eager to see how the remainder of the year will play out for the IPO market. Despite Uber and Lyft’s performances, every indication suggests heavy-hitters including Slack, Postmates, The We Company (WeWork), and Palantir are staying on course to complete their public offerings. It’s clearly too early to estimate how these offerings will perform, but public investors have shown they have a strong appetite for growth — something these companies tend to have in abundance.
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