Investors are becoming bearish on tech IPOs after disappointments from Uber, Lyft and WeWork.
The market for initial public offerings of technology companies has been badly shaken by the poor performance of this year’s marquee issues, most of which are trading well below their opening prices. Other tech IPOs have been withdrawn, as investors have questioned the high price tags on loss-making businesses.
Goldman Sachs, the leading stock underwriter this year, sustained a 26% decline in earnings for the third quarter, in part due to paper losses on its holdings of Uber Technologies and other tech issues that fell in value.
Cracks appeared in the IPO market in May, when high-profile Uber—the biggest US startup on record—plunged 7.6% below its offering price in its first day of trading. The $76 billion IPO was a huge disappointment, and set off warning bells that all was not well in the system for valuing technology companies.
Another big shock came in September, when WeWork pulled its listing plans after failing to entice investors despite a huge reduction in the price it was willing to accept. Valued at $47 billion in the private market, WeWork lowered its expected valuation to below $20 billion before throwing in the towel.
More disappointments followed. Peloton Interactive, known for its pricey exercise bikes, closed out its first day of trading with an 11% loss. Talent agency Endeavor withdrew its planned IPO at the last minute after previously cutting the price range.
Bill Smith, CEO and founder of Renaissance Capital, says more companies are staying private longer or opting for a less-expensive direct listing, whereby outstanding shares are sold without the involvement of underwriters.
Workplace messaging service Slack Technologies chose the direct listing route for its stock offering in June, but the company has fared no better than other tech IPOs. The stock began trading at $38.50 a share and has since tumbled to below $25.
“WeWork’s planned IPO turned into a highly publicized debacle that suggested public investors may finally be done overpaying for blazing-fast growth,” Smith says.
The combination of poor aftermarket returns and a dip in initial filings suggest that IPO activity will finish the year at a slower pace than previously thought, with greater price concessions on the part of issuers, Smith says.
Japanese tech conglomerate and venture capital firm SoftBank and its Saudi Arabia–backed Vision Fund have pumped billions of dollars into Uber and WeWork. They are hoping for a better outcome with Oyo Hotels & Homes, India’s biggest and fastest-growing hotel chain, which raised $1.5 billion in its latest round of funding. Oyo’s founder, Ritesh Agarwal, 25, poured $700 million of his own money into the fundraising, with SoftBank and other investors putting up the rest. Agarwal also is buying $1.3 billion of existing shares from early investors, bringing his stake in Oyo up to 30% and giving the loss-making company a valuation of $10 billion. There are fears that venture funds with deep pockets are distorting the true value of growth companies with no clear route to profitability.