Why are IPOs being delayed?
IPO Delays: Why Unicorns Push Back Public Debuts
Things have changed on Wall Street, and you’re starting to see that materialize via IPO delays.
WeWork parent The We Company pushed back its IPO as investors scoffed at its desired $47 billion valuation.(TIMOTHY A. CLARY/GETTY IMAGES)
2019 WAS SUPPOSED TO BE the year of the IPO. And yes, there have been some big ones. But the two biggest and most highly anticipated IPOs – Uber (ticker: UBER) and Lyft (LYFT) – have both been major disappointments.
Sure, maybe those two were simply mispriced. But in the subsequent months, a handful of multibillion-dollar private companies expected to tap the public markets have delayed their IPOs.
WeWork parent The We Company pushed back its IPO as investors scoffed at its desired $47 billion valuation, leading to CEO Adam Newmann stepping down. Airbnb announced it’s pushing back its IPO until 2020. Tech unicorns Postmates, Robinhood and Stripe don’t look like they’re hitting exchanges in 2019 either.
What’s happening? Why are IPO delays becoming par for the course, even when it comes to some of the most high-profile names that investors have been dying to buy in on for years?
Here’s a look at three major reasons for this trend.
Unprecedented Access to Private Capital
It used to be that once private companies hit 500 shareholders (including employees), they were forced by law to go public. That changed in 2012 with the signing of the JOBS Act, which raised that number to 2,000.
“That’s why Google (GOOG, GOOGL) went public when they did,” says John Jacobs, executive director of the Georgetown Center for Financial Markets and Policy. “The thing that forced Google to go public didn’t force Uber and those guys to go public. So a lot of these companies are delayed in the private market much, much longer.”
More broadly, the prospect of hitting the next grand slam in Silicon Valley, combined with a 10-year bull market and extremely cheap access to capital – well, they’ve encouraged a flood of money into venture capital and private equity, giving companies no shortage of investors to seek funding from.
“They’re bigger and they’re private but it doesn’t mean that there’s been any lack of speculation,” Jacobs says, referring to the valuation of private companies in today’s environment.
Companies Are Unprepared for Corporate Governance
Recently, one of the worst examples for corporate governance the IPO market has ever seen began making its way through the system in a bid to become a public company.
The reasons varied, but one of the central concerns was a culture of blatant self-dealing revealed in the company’s S-1 filing with the SEC. It turns out that the CEO, Neumann, had personally trademarked the word “We,” only to sell those rights back to WeWork for nearly $6 million. He also owned a handful of properties himself that he turned around and rented to the company. If that weren’t enough, Neumann raised over $700 million by selling and borrowing against shares of the company in his name.
The company announced that Newmann will remain on the board as non-executive chairman.
Had the availability of private financing been harder to obtain, it’s unlikely WeWork would’ve garnered more and more funding or tolerated this sort of executive behavior. After all, this is a company that lost $690 million on revenue of $1.54 billion in the first six months of 2019.
“I think these companies are absolutely spoiled by private money,” Jacobs says. “These private investors have different expectations than the public investors. The private investors, they’re looking to the public investors to be their exit strategy.”
The standards between the two investor classes are so different, in fact, that a recent Goldman Sachs (GS) report claimed the batch of IPOs in 2019 would be the least profitable of any year since 1999 – the height of the dot-com bubble.
Just 24% of 2019 IPOs are expected to be profitable in their first year of trading, Goldman reported, the lowest figure since 28% in 1999.
There Is Uncertainty in IPOs
Last but not least, one of the final, most prominent reasons for IPO delays this year is an old hat: uncertainty itself.
“The best thing to derail any IPO market is uncertainty. And if we’ve had anything in the markets in the past few months it’s uncertainty,” Jacobs says. “Political, economic, interest rates – there’s a ton of uncertainty.”
Specifically, the U.S.-China trade war has occupied central stage in the political area, causing stock market fluctuations almost weekly depending on whether the developments were considered positive or negative for negotiations.
Economically, not only do higher prices from tariffs on Chinese exports threaten to slow down or halt growth, but an inverted yield curve could forebode recession. It’s preceded the last seven recessions in the U.S.
When in Doubt, Seek a Venture Capitalist
So, home rental website Airbnb – after spending year after year as one of the most highly anticipated IPOs on the scene – is making public investors wait yet another year, delaying its IPO until at least 2020.
Despite privately filing for an IPO, delivery network Postmates raised $225 million at a $2.4 billion valuation in private markets, signaling it could remain cash-flush enough to operate independently for a while.
Same thing with Stripe, the payment processing company which just achieved a $35 billion valuation on the heels of a $250 million investment.
And WeWork – well, WeWork hasn’t opted out of going public voluntarily, and likely needs IPO money to stay afloat. At some point, there’s a sweet spot, a perfect chunk of time when it makes sense to go public. WeWork passed that moment, and it’s not coming back.
Whether some of these other unicorns appreciate the fact that they can only shun the “uncertainty” of going public for so long before the strategy of seeking private money gets flipped on its head remains to be seen.
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John Divine is a senior investing reporter for U.S. News & World Report, where he’s been … READ MORE