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20
Apr 19
Sat

It’s IPO Season

Strap in for thousands of investors and employees to get liquid in the coming months. Lyft, Zoom and Pinterest are among the first out of the gate, and it’s clear to me that the market really only cares about two things:

  1. Top line growth: Revenue growth of 50%++ is really going to juice up the valuation. You get huge multiples because at these growth rates, investors expect these companies to quickly “grow into” their valuations. (Facebook IPOed at $104bn in 2012 on 2011 revenue of $3.7bn for a 28x revenue multiple. In 2016, it recorded $23.8bn in revenue, and $46.4bn in 2018.)
  2. Profitability: Obviously this isn’t a requisite, but if a company is continually making a loss, it raises the longer term question of whether the business model is fundamentally flawed – do the unit economics work? You’ll tend to get a lot of short interest if there is a crowd who doesn’t believe the business is actually able to make more money than it spends. Of course, it’s important to understand what is driving expenses. In most cases, it’s heavy investment to drive growth (but if it’s all going into sales, are they spending $1 to buy $0.95?). Free cash flow might be a better metric for seeing if the business model is sustainable, but you have to also be wary about other expenses like servicing debt (although debt financing is relatively rare in this place). Also, when a company IPOs, that event may trigger a bunch of employee equity to vest, which is recorded in the financials as an expense, and that can impact the headline numbers.

If you can make a profit and demonstrate tremendous growth, you end up with a company like Zoom, which is the only company on the list that is profitable, yet has eye-watering 100% y/y growth… and look what happened to it on the first day of trading.

Here are the stats for the recent IPOs:

  • Lyft (2012 / 4.9bn funding @ 24bn IPO val, 16.7bn val today / 2018 2.2bn rev on 911m loss, 2017 1.1bn rev on 688m loss) — I don’t really know what to make of this business and whether it truly can become profitable while sustaining a decent growth rate. The dip in value over the last few weeks shows a lot of skepticism in the market as well.
  • Zoom (2011 / 160m funding @ 9bn IPO val, 16bn val today / 2018 330m rev on 7.6m profit, 2017 120m rev on 3.8m loss, 2016 60m rev on 14m loss) — the most successful business in this post, in my opinion. Viral business model, clear consumer and enterprise strategies, what’s there not to like? Anecdotally, I see Zoom being used for work much more commonly than alternatives like Webex and Uberconference (although the latter has a great UI).
  • Pinterest (2009 / 1.5bn funding @ 10bn IPO val, 12.7bn val today / 2018 756m rev on 63m loss, 2017 472m rev on 130m loss, 2016 299m rev on 182m loss)

Upcoming IPOs

The tech companies below are anticipated to IPO in the coming year. Without doing much research on them (and only cursory searches to find the publicly reported financial data below), I’ve ranked them in order of what I personally think are the most promising based on what I know of their business model.

  • Airbnb (2008 / 4.4bn funding @ 31bn val / reported 2017 2.6bn rev on 93m profit) — an extraordinary business (I used to work there as a contractor so I admittedly have a bit of bias here). I turned down an attractive offer to join them as an FTE – something I did knowing I’d regret – but it was to do something that I also knew I’d deeply regret if I didn’t.
  • Slack (2009 / 1.2bn funding @ 7.1bn val / reported 2017 221m rev on ?) — I like this company so much that I bought some stock on the secondary market a couple of years ago
  • Uber (2009 / ~25bn funding @ 76bn val / 2017 net 7.8bn on 4bn op loss, 2018 net 11.2bn on 3bn op loss) — everyone knows about Uber. It’s got the biggest numbers out of them all, and there’s so much hype about them that, at least in the short term, the stock is going to pop once it starts trading. See also comments on Lyft above.
  • Peleton (2012 / 995m @ 4.15bn val / reported 2018 800m rev run rate & profitable, 2017 <400m rev) — in the longer term, Peleton needs to successfully expand beyond bikes to other products, like its new treadmill. It reminds me a little bit of fitness consumable makers GoPro and Fitbit, except that Peleton also has a great subscription business.
  • CloudFlare (2009 / $332m funding @ 3.2bn val / financials unknown)
  • We Company (2010 / 12.8bn funding @ 47bn val, 12/2018 annualized rev $2.5bn) — no idea if this is a sustainable model or what happens if the bottom falls out of the property market again, but through great marketing and positioning, it looks like they’ve beat incumbent players like Regus (now IWG) at their own game
  • Robinhood (2013 / 539m funding @ 5.6bn val / financials unknown) — massive user growth, but an opaque business model
  • Fastly (2011 / 219m funding @ ? val / 2018 145m on 29m loss, 2017 105m on 31m loss)
  • Asana (2008 / 213m @ 1.5bn val, 2018 100m ARR)
  • Postmates (2011 / 681m funding @ 1.85bn val / financials unknown)

Bay Area Impact

The NY Times wrote a provocative article entitled “When Uber and Airbnb Go Public, San Francisco Will Drown in Millionaires“. The basic premise is that, flush with cash, a bunch of professionals in their 20s and 30s will push up the pricing of everything in the city – most of all real estate. In an area where all-cash purchases of housing are common, adding thousands of millionaires to the pool doesn’t sound like it will help with affordability. No one knows what will really happen, but there are several different theories.

(1) Increased post-IPO demand for properties will lift pricing, as the cashed up millennials will be able to muscle out the competition by making all cash bids above asking.

(2) Sellers are holding onto inventory now, waiting for the demand to come later. A spike in supply at that time could actually mean that prices don’t move as much as they might.

(3) If you make enough money, it may make sense to move completely out of state. I know people who have moved (whether it’s actually moved, or moved for 181+ days) to no income tax states like Washington and Nevada to save the 10%+ income tax that California levies. (California taxes capital gains at regular income, with no special treatment for long term capital gains.)

(4) Buyers in the market today may move forward their plans to buy, to avoid getting caught in the post-IPO rush.

(5) Remember that there’s a 6 month lock-up period after most IPOs, so there’s a little bit of a lag. (The exception is direct listings, like what Spotify did and what Slack is reported to be considering.)

(6) The real estate market this year seems to have plateaued over the last 12 months or so.

(7) Macro factors are always at the back of my mind. The expansion cycle we’re in has been one of the longest in history, and it’s been fueled by historically low interest rates. However, all the value has been accruing in assets – not wage growth, which is why inflation appears stubbornly low. (Trump’s fiscal stimulus isn’t helping.) I haven’t looked at the figures, but I’m sure a tremendous amount of debt has built up in the system (money is cheap, and somewhat perversely, there are a ton of negative interest rate bonds that have been issued). That’s a powder keg waiting to blow. And when it blows, everything heads towards zero* – quickly. I have more thoughts on this, but that’s for another post.

*The great thing about buying a house using all cash, is that you’re not saddled with a big mortgage – so if there’s a downturn, you’re not going to be a forced seller of assets to meet debt repayments. Assuming you aren’t levered somewhere else, right?

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