And now WeWait: why are so many shiny startups delaying IPO?
Who could forget the images released this summer of Uber’s first intern (now a senior executive) ringing the IPO bell at the New York Stock Exchange, surrounded by delighted colleagues?
An Initial Public Offering (IPO) has long been considered the pinnacle of a successful startup — at least for share and equity-holders, who finally get the opportunity to cash in on their investment. For those unfamiliar with venture buzzwords, an IPO is the process of offering shares in a private corporation to raise capital from public investors.
Despite the triumphant images, recent headlines have pointed to a trend of companies delaying their IPO — WeWork (formally & henceforth The We Company) being the prime example in this instance, but also Postmates, Airbnb, Robinhood, Stripe and even Saudi Aramco. Simultaneously, the performance of those which did bang the IPO gong has proven lacklustre: Uber and Lyft shares are hovering at all-time lows.
So… what is holding them back?
The IPO process itself
The IPO process is remarkably intense — perhaps the most thorough inspection that a company will undergo in its entire lifetime. Bankers, Auditors, specialised lawyers, and government bodies spend months combing through company records, down to every last number. Risks must be identified, accounting perfected, and all the proper controls in place.
Simply put, some startups are not ready for this level of scrutiny — The We Company example is a prime one here. Since the IPO process kicked off in August 2019, ostensible holes in the structure of The We Company have come to the fore.
Issues noted included an excessive amount of power allotted to CEO and co-founder Adam Neumann. Indeed, the original IPO filing proposed allocating “more than 50% of the total voting power” to Neumann to “limit the ability of other stockholders to influence corporate activities.” Neumann’s questionable dealings included that of leasing properties owned by himself back to WeWork for a profit. Another fun trick involved personally trademarking the “We” prefix — and selling it back to his own company for US$6m. Clearly, corporate governance had been sparse. Neumann has since stood down from his role as CEO, under immense pressure from investors (if this is a topic that interests you, see our article on founder exits here).
Issues were, however, not limited to Neumann’s leadership style. The company’s questionable financials and issues with its valuation have also been sources of contention. The We Company was valued at US$47 billion in January 2019, with a revenue of US$2.6 billion — giving them an 18x price-to-revenue multiple. In contrast, with a market capitalization of flexible office space competitor IWG (formerly known as Regus) is US$3.6 billion on a 12-month revenue of $2.7 billion, giving them a 1.3x price-to-revenue multiple.
The We Company’s initial valuation was closer to that of a high-growth tech company than of a real estate business — we won’t comment on which is more suitable, though Neumann would advocate the former. Since filing for IPO, the valuation has fallen to as low as US$10 billion (aided in part by the Neumann scandal). Predictions by banking giants such as Goldman Sachs that The We Company could achieve a public valuation of up to $65 billion have additionally thrown their wisdom — and impartiality — into question.
It is difficult to evade corporate governance when making an IPO bid — in contrast, unlike the IPO due diligence process, one essentially needs little more than a well-executed powerpoint deck to attract private funding. Charismatic characters such as Neumann and fellow ousted CEO Travis Kalanick (of Uber) thrived in this context; with pseudo-profound statements about their “mission to elevate the world’s consciousness” and the “energy of we”, these natural salesmen outstripped competitors in their ability to attract funding and merit high valuations. Unfortunately for Neumann, the lofty statements that appealed to private investors are no match for a good old-fashioned audit.
Increased Ease of Raising Private Capital
The main objective of an IPO is to raise capital from public investors. More capital theoretically enables greater growth and expansion. Public companies are also able to obtain better terms with creditors, thanks to their necessarily increased transparency and credibility.
IPOs were once a key means of accessing the substantial capital necessary for growth, but today, it’s easier than ever before to raise funds privately.
The public vs. private capital raising playing field has been levelled, with an unprecedented amount of access to private capital. Instead of opting for a time consuming, freedom-limiting public listing, founders can seek cash injections from a legion of Venture Capital (VC) and Private Equity (PE) investors looking to hit their next startup jackpot. This trend has been aided by a combination of a long-running bull market and low interest rates, both making it easier to borrow funds.
While VC-backed and PE-owned companies are still beholden to their investors, this is a different commitment to that which comes with being floated on the public market.
This blog post by LocalGlobe Partner George Henry nicely details the tension faced by high-profile tech companies (both private and public) with the finance world, with running disputes over which metrics to measure performance and valuation of technology companies. Elon Musk’s Tesla is a popular subject in such disputes, a favourite of shorts sellers everywhere — such was his frustration with the public markets that Musk even threatened to take the company private (at $420 per share, no less) in 2018. VCs, from whom most startups seek private funding, profess to be more concerned with impact than hard financials.
Without the intense scrutiny that comes with a public listing, forgoing IPO arguably offers a better environment for the pursuit of projects that don’t straightforwardly aid stock price. See Elon Musk’s 2018 letter to SpaceX employees on the subject of going public, wherein he addresses the issue of employees becoming “distracted by the manic-depressive nature of the stock instead of creating great products” following IPO — an issue that Musk is certainly familiar with.In short, a company going public risks a shift in focus to the short-term, away from a long-term product-first strategy to one dictated by volatile stock prices. This is perhaps less high-stakes in the co-working office space than the literal ‘space’ space that SpaceX operates in — the consequences of a poorly ‘shipped’ spaceship are greater than a bad UI on an office management app. Either way, though, the principle is the same, that during the IPO process and post-IPO companies must show more restraint and this may stifle innovation.
How does it impact employees?
Apportioning equity is a great way for cash flow squeezed startups to attract top talent even when they cannot (at least upfront) pay top dollar; as a natural result, it is common for startup employees to hold equity in the company they’re employed by.
The jargon of an equity offer is complex, but always includes mention of a ‘liquidity event’. A liquidity event is essentially a merger, acquisition or IPO — basically, this is the moment the (cash) cows come home and employees can cash in their equity.
A successful IPO is thus considered pretty desirable to equity-holding startup employees, depending on where they are in their vesting schedule and their liquidation preference. However, the desirability also depends on whether they wish to hold on to their equity or liquidate upfront — those with a longer-term view may be more suspicious of IPO, particularly given the poor performance of certain stocks post-IPO.
A trend for delayed IPOs is, then, a mixed bag for startup employees. It means that they’ll have less immediate access to hard cash from their equity (absent an alternative liquidity event), but they’ll retain the freedom to innovate as a typical startup.
What does the future hold?
Countless companies (think Facebook, Twitter, LinkedIn) have proven that the tech and finance worlds aren’t inextricably at odds with one another and successful IPOs can occur, but many tech startups indeed lack the typical metrics that public stock purchasing individuals prioritise. The famed economist John Maynard Keynes described the psychological and emotional triggers for investment as ‘animal spirits’ — the animal spirits of traditional public investors are alarmed by such metrics, while those of institutional private investors are nonplussed. As a result, even the most successful tech companies pursuing IPO may encounter scandal and disappointment, at least in the short term.
We would hesitate to make solid predictions, but recent flotations have called into question the public market’s appetite for loss-making technology (and perhaps real estate) startups. Maybe it is simply a matter of understanding — in the words of Peloton’s (listed 26/9/19) Chief Executive, “You say losses and cash burn; I say investments.”. Time will tell whether the naysayers will be disproven, but in the meantime, we wouldn’t be surprised to see a continued increase in the number of shelved IPOs. For now, WeWait and see.