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ANALYSIS: Unicorns Stumble, IPO Prospects for Hot Companies Dim

Nov. 4, 2019, 12:22 PM

The current year has been brutal for initial public offerings by “unicorns,” or private companies valued at a billion dollars or more. Uber and Lyft stumbled badly out of the starting gate, and WeWork never even made it that far before shelving its planned offering. Lyft opened at $72 per share, and is currently trading around $40. Uber opened at $45, and is struggling near $30 as of this writing. Slack‘s direct offering and SmileDirectClub’s IPO also limped away from their market openings.

In light of the IPO horror stories of 2019, what will 2020 hold for private companies seeking to tap into the public capital markets?

Will Profits Matter?

Will investors expect IPO prospects to demonstrate a path to profitability? A profitable track record is not a precondition to IPO success and acceptance in the public markets (insert “Amazon” here). However, the recent trend of IPO companies bleeding cash after going public may give investors pause in the future. Growth over profit has become the mantra of today’s IPO market, but how workable is that model in 2020 and beyond?

Will investors in 2020 realize that it takes more than a good idea and some clever slogans to make a viable public company, and will they expect those companies to actually have a plan to make money? Adam Neumann, WeWork’s now-toppled CEO, once said that “our valuation and size today are much more based on our energy and spirituality than it is on a multiple of revenue.” Will investors look past “energy and spirituality” to see potentially flawed business models that are regularly losing money?

Governance Questions May Loom Large in 2020

Will governance matter in 2020? In the private markets, too much money has been chasing too few targets for quite some time. Because of this imbalance, investors have been willing to overlook significant corporate governance deficiencies. In recent IPOs, we have seen multi-class share structures without sunset provisions designed to protect founders, unreported related party transactions with corporate insiders, and internal control structures that leave a lot to be desired. For example, among WeWork’s many problems, the company paid approximately $6 million to a founder-controlled entity for use of various “We” trademarks. Adam Neumann also served on the company’s compensation committee.

Will investors say “Enough!” in 2020? SoftBank for example, can afford a few stumbles after its successful Alibaba investment, but the pressure grows with each Uber and WeWork misstep. Investors still have plenty of money, but the window for companies with ineffective governance structures would definitely seem to be narrowing.

Financial Disclosures or New Age Tracts?

In 2020, will private companies seeking access to the public markets prepare S-1 filings that sound more like financial disclosure documents than self-help guides? Peloton wrote in its registration statement that the company is “transforming the lives of people around the world.” According to its Form S-1, Peloton doesn’t just sell exercise bikes and video subscriptions. It sells “happiness.” Before WeWork saw its IPO dreams unravel, the company wrote in its S-1 that “if we created a community that helped people live life with purpose, we could have a meaningful impact on the world.” Watch this space to see if issuers use their registration documents to present an accurate financial picture of the company rather than producing marketing documents filled with lofty rhetoric. Also look to see if investors are actually reading them.

What’s Next?

Look for companies with several funding rounds and hazy profitability prospects to continue to venture into the public markets. It will be very interesting to see what lessons investors have learned from WeWork and other IPO misses, and whether those investors demand that companies who want their money must demonstrate sound business plans and realistic expectations of profits backed up by healthy corporate governance structures.

Read about other trends our analysts are following as part of our Bloomberg Law 2020 series.