It was certainly bad timing, going public as epic market volatility, completely unrelated to the business model, overwhelmed the markets. But there was Uber, sucked into the riptide, pulling its early investors underwater.
A company “goes public” when it succeeds and needs capital to grow, and so sells shares of its equity (ownership) in the public stock markets. Thereafter, its stock is publicly traded and available for investment by mutual funds, exchange-traded funds, insurers, and individual investors. This also opens the company to scrutiny by regulators, analysts, and investors, and to the discipline of standardized accounting and quarterly reports.
Prior to this initial public offering (IPO), the company is typically owned by its founder(s) and by its venture capital or private equity investors, who have supplied capital in exchange for the promise of super-sized returns when the company goes public. One of Uber’s investors, First Round Capital, just saw its initial investment of $500,000 turn into $2.5 billion, for example.
This year there may be more IPOs than usual. Several tech disrupters recently have gone or are expected to go public. Uber followed Lyft, its ridesharing rival, into the public markets, and WeWork, Slack, and AirBnB are expected to follow; it’s a subdued, but noticeable second wave of the dot.com boom, with some important differences.
Many of these companies emerged in the wake of the Great Recession. The smartphone and then its apps provided enabling technology, while the real legacy of the dot.com boom, the power of private equity, provided enabling capital.
By all appearances, however, this time it really is different from the 1990s, when companies rushed to go public and founders rushed to cash in, moving quickly to the new, new thing. These companies have waited. Moreover, the stock market has not been awash in the froth of steep IPO valuations, and in fact, Lyft and Uber values have so far disappointed.
Capital market forces have played a role. With interest rates so low for so long, bond prices have stayed high, so a company looking to raise capital would be better off issuing bonds and taking on debt, all else being equal, than issuing stock. And entrepreneurs increasingly want to keep control: even when stock is publicly issued, it is done as a second class with less voting power, so that the private investors retain control.
It may also be that investors have learned lessons from the last dot.com bubble. For one, the company that is first out of the gate with a disruptive idea may not be the one to realize its returns. It takes management skills to nurture an idea into profit. For another, not all profit models can be sustained and turned into growth. Without barriers to entry, competitors can enter a market—hence Uber and Lyft—driving down prices and profits.
In addition, private companies have many ways to spin their “success,” unfettered by the constraints of accounting conventions and disclosures. But those “returns” don’t often hold up to the daylight of due diligence and analysts’ expectations. Investors have seen too many expenses masquerading as “investments” and promises passing for “revenues” to be as sanguine as they once were.
So far, these new markets have been largely unregulated, but their success is changing that as well. Taxi companies have fought ride sharing since inception, but now municipalities are discussing regulation because of the additional burdens of congestion. Localities are also discussing regulation of AirBnB and its competitors, largely to collect tourism taxes, an otherwise lucrative source of local revenues in many places.
And, unintended consequences can take their toll on the business model. Originally, driving for Uber was a side hustle, a way to earn some money in your spare time, but now that people do it for a living, demands for a fairer share of the fare threaten to shrink the company’s profitability, and driver turnover has become a real cost.
In the original dot.com era, many of the companies that went public failed after burning through investors’ cash, so investors are much more cautious. But so are the founders and venture capitalists that back these ventures: wary of losing control, having to be transparent, and being held to account. There is more private capital now, and more of it is staying private. If companies are going public, it may be because their private equity firms see this as their best exit strategy, not because the firm has proven its potential for long-term success.