In recent times, there have been multiple startups that went IPO with a lot of hype – Lyft, Uber, Zoom, Pinterest, and China’s own Luckin Coffee were at the forefront of the news.
Now, while many may claim that Lyft and Uber received their come-uppance by ending up below their IPO valuation very quickly, they still managed to unload a lot of shares at a decent valuation. Luckin has fared much better with an initial spike in valuation. What unites these 3 companies? None of them has ever made a profit and none of them (if you read between the lines a bit) claims any possibility of doing so. While Lyft and Uber have many years of loss making history behind them, Luckin has very smartly gone public before it has too much of this kind of history.
Lyft has additional woes as its investors sue it over alleged misrepresentation in its IPO.
Zoom, on the other hand, has been hailed as “the profitable unicorn” which, ironically, highlights how few unicorns are profitable.
I don’t think anyone is buying Uber stock in the expectation that it will pay out in the longer term, with dividends, stock splits and the like. Most investors seem to be buying it in the hope that the valuation will go up and they can sell at a profit. Somehow the way in which the pre-IPO valuations of these companies kept multiplying seems to make people think that will continue long enough for them to make a killing.
Here’s the sad news folks – the people who were going to make a killing on Uber have already done so. They’re all the folks who bought in early and fuelled the hype. Each round of investors bought in hoping there would be a next round at an even higher valuation – but that cycle ends with the IPO.
You want to make money from a startup going public? Buy into their shares long before they go public. Or better still, start your own company.
Here’s some thought provoking links on the subject of recent IPOs.
Not all unicorn IPOs are bad, obviously. Zoom has come to market after several years, working patiently to establish a working model for a viable company.
Zoom expected to break even for last quarter
The thing is, the mentality in today’s investment market is that you just have to ensure there’s one layer of suckers left to buy stock from you at a higher valuation than you paid. That may continue for a while longer but as the majority of startup IPOs lead to sharp drops in investor value, the entire startup / IPO route will start becoming questionable. Hark back for a moment to the symbols of solidity from 20 years ago, the blue chip companies as we called them. P&G for instance, where if you held stock for a long time, they kept paying dividends and issuing stock splits so that, as the fable goes, many a secretary from the early days ended up a millionaire.
Isn’t that the story we should be seeking to live out – support a company in its early days, and over time, see it deliver value to customers and shareholders. I don’t think Uber, Lyft or Luckin particularly care about their shareholders apart from seeing them as a convenient source of cash or as a way for the VCs and funds to unload their shares at a profit.
It reminds me of an O’Henry story (A Tempered Wind) where a pair of grafters hatching a Ponzi scheme get an attack of conscience when they realize their investors are all poor people, and get them lined up to return their money. (The illustration above is from the story) One of them admonishes the people in the line as he returns the money – “Salt away that chicken feed in your duds, and skip along,” says Buck. “What business have you got investing in bonds? The tea-pot or the crack in the wall behind the clock for your hoard of pennies.” While that may not be the advice I give I’d certainly advocate that you invest your hard-earned money in companies that are going to be around a long time and generate a profit and dividends over their lifetime. “What business have you got investing in unicorns, the blue chip that’s been around the last 50 years for your hoard of pennies” I’d say, to paraphrase Buck Skinner.