The IPO Bonanza
After predicting an IPO bonanza in my new year’s day post in 2015, and being largely wrong about it for four years, we are finally seeing it
I am not exactly sure what it is about this year, as opposed to any of the last five years, that has drawn all of these highly valued private companies into the public markets, but here we have it.
It does take a number of years for a privately held company to prepare to be a public company. They need to get their
Already we have seen S1s from Lyft, Pinterest, and Zoom. And we are likely to get them soon from Uber, Slack, Airbnb, and a host of others, in the coming months.
I see this as largely beneficial to the startup sector for the following reasons:
1/ We will have benchmarks from highly liquid markets in terms of what these high growth tech companies are worth. Until now, most of these benchmarks have come from illiquid private market auctions, which are not exactly the best price discovery mechanisms.
2/ Many employees, angels, seed investors, VCs, and growth investors will get liquidity from these investments and recycle it back into the startup sector. More capital means more startups and more innovation.
3/ Limited Partners, the providers of capital to venture capital and growth equity funds, will get large distributions which will give them more confidence in the startup sector and they will continue or perhaps step up their commitment to invest in
4/ These newly public companies will be able to accelerate their acquisition programs now that they have liquid stock and cash to fund those deals. That will further flow capital back into the startup sector.
Of course there will be negatives. It will be harder than ever to afford to live in the bay area. But tech folks from the bay area are certainly welcome in NYC, LA, and any number of other startup regions around the US. Get paid on your stock and move to a more affordable and liveable region!!!
And the monster funds that have been advocating staying private forever will have to argue why these IPOs are not what every other startup should be aiming for. And I think that argument is going to be harder and harder to make with this IPO bonanza under way.
All in all, I think the IPO bonanza that is under way in 2019 is a good thing. I have been expecting it and wanting it for years and I am pleased that it is now upon us.
Yup, I agree.Someone asked me recently, my best moment in building companies.When Creaf went public was certainly it.Seeing my group of very young, stretch employees, recruited mostly from music and guitar shops looking for midi expertise, living with their parents to people buying cars, getting married, first homes leaving to start their own things.To cool.
I wonder if they all started up in the same previous phase (conditions) of the ‘cycle’? There’s a rhythm in most things.NYC is liveable?
Best place in the world to charge your batteries. So much energy!
The whole system is broken, you can mock Bay area now for cost of living but NYC is obviously not far behind and if you get your wish of NYC tech IPOs the same problem will emerge in nyc. Fixing the system is a better approach, and with coin based financing we are almost there.
I wish the drivers in Lyft were recipients of some of the value they helped create all these years (above and beyond what they make driving which doesn’t take them far). I hope Uber finds a way to include theirs, as I know they were trying to do. The next crop of companies that can go public should figure out how to truly be “inclusive” of those who helped create the value on the big day… that would be real innovation. As it stands, the gap (mostly) continues to widen.
I believe Lyft did give drivers a $10,000 (?) bonus if they were driving a certain number of hours the past year(s)?
No doubt these IPOs will generate instant billionaires (institutional investors) and millionnaires (founders, employees & smaller investors), but it’s all subject to the 180-day lock-up rule, so it’s dependent on what prices do at the end of that period.
I think this is a long game as it has always been and that is where it drives change.Why would this be different than any other cycle of IPOs?
I was stating a fact, which is the lock-up period. Typically, there’s a rotation of investors that takes place. Old ones get off, new ones enter.
ahh.always been one to my knowledge, still is.
After 180 days i expect all to have lower prices.
who knows. it could be up or down!
You and everyone else here concerned with the end of the lockup period read my little piece here about how to use optimal stopping on a Brownian random bridge to pick the sell time. Lacking anything better, it’s no joke. Try it on a dozen or so examples and see if it makes money.
Palantir has a chance. Its snout is deep in the government tax trough, and it probably has the leverage to squeeze more contracts out of the state ecosystem. It probably has a few in the pipelne.
I’d like to see it happen earlier in a company’s life. Microsoft went public at less than $1B. Not only did Bill Gates get rich, but Americans that took a risk and invested in the company after it went public got rich.Yes, 2001 was nasty. But, I’d rather take the risk of a 2001 and giving all Americans the chance to participate than the way it is now where companies don’t IPO until way later in the cycle.
LYFT on Friday
$23B. Would have liked to see them go public at $1B. Americans missed out on the chance to grow wealth by $22B.
The inside rich people getting richer. Joe Public gets pushed further down the pyramid.
I thought that the big bucks were in the pension funds.
Are you saying that Americans are not missing out because their pension funds are getting fatter? Most private citizens no longer have pensions. These are government employees.I was trying to agree with you. Per your comments – It seems that private funds are making 15% versus Joe Public potentially making 15x.
Of course, I’m really short on good details, but my long understanding is that nearly all the limited partner money for the VCs comes from pension funds for employees from somewhere. Maybe as in the movie The Big Short the LPs are “The Michigan State employees pension fund”, i.e., government employees. I didn’t know that private persons mostly no longer have pensions. IBM had pensions; last I heard, their pension program was well funded.If so, then the big bucks from the VC funded IPOs should be going to the pensions of common man in the street. long time wage slaves, maybe only a small fraction of them but still not nearly all to the top 1%.Yes, some of the larger pots of money are university endowments. E.g., Harvard has $35 B or so? So, this money is all just to provide scholarships to poor but worthy and talented students, right?Yes, maybe the family offices or sovereign wealth funds have the rich getting richer.And: IIRC Gates mostly sold off his Microsoft stock and had some really good investment advisors, maybe one from that famous oil family in Texas, put Bill into lots of goofy things, maybe funds that invest in VCs, private equity, private placements, real estate, lumber, etc. In that case, maybe Gates got some bucks from the Lyft first day pop.Then for individuals there are the IRA, 401K, special life insurance, etc. options: Maybe that money goes to Fidelity or some fund and maybe they act as LPs for VCs and got some bucks from the Lyft pop. Or maybe a wealthy father saves one level of taxes and just gives his children cash, gold coins, loans, etc.Again I just don’t have details.One really good thing about how JLM/BRC write on such topics is that they get and report a lot of relevant details. Apparently in all of the MSM such details are cause to be fired!I know; I know, there is the Heinrich Heine: Weltlauf: Hat man viel, so wird man bald Noch viel mehr dazubekommen. likely clear enough even if hat schon vergessen oder nie gelearnt Deutsch.Of course I should repeat the remark left over from the 1999 Sand Hill Road bubble blowing party:Never be between a VC and the door when the lockup period is over!. Uh, by the way, Fred, just when is the Lyft lock up period over? Ah, I’m not going to buy any Lyft stock, or try to short it just before the lockup period is over, so don’t bother!But, but, but, suppose some history shows that within a week after the lockup period being over, on average the stock drops by x%. Argue from Brownian motion that between now and then the expected value of the price won’t change. So, argue that between now and then we have a Brownian bridge with an expected x% drop at the end.Sooooo, the price will start down before the end of the lockup period in anticipation of the x% loss. So, when should a long position sell?Okay, we have enough to formulate a problem, optimal stopping on Brownian bridges. Once I worked out the math and wrote the corresponding software and a nice technical paper. Uh, it’s some applied math and NOT AL/ML!!And I can believe that too often the US free enterprise economy works a lot like the Serengeti plain in Africa. Ah, the US far Right would like that because it seems to fit with Darwin, eugenics, Hitler, etc.!When my brother — dedicated liberal — was trying to do some investment management and someone mentioned “obscene returns”, he was enough on top of his game right away to respond “Those are the best kind!”. Well, for my startup, I’m trying for “obscene returns” too!
Why are they (‘we’) entitled to that?
Those companies were profitable at that level, no?These companies have a very high likelihood of being a bigger, badder DotCom disaster.Lyft is spending $50 to earn $30 but will sell you the whole company for $1000…….basically.
Public markets don’t lie. If companies continue to IPO at unjustified valuations (as evidenced by declining share prices), then we could see a push for earlier and more realistic launches, and a lot less hype. Some of these valuations and subsequent share prices are nothing more than Fool’s Gold.
They’re capturing maximum value while they can, not leaving profits of possible uphill trends for the general public. They’ll do this as long as public market investors and more likely funds, stop buying into these.
While this is great and I love the smell of success boy is the success of tech creating challenges for me in Boston. Hiring a street fight. Retention is nearly impossible. I’m currently trying to find a new apartment and it is war. You have to pay brokers a fee and many of them do no work beyond showing you the apartment for 15 minutes. If you don’t apply on the spot someone else takes it. Being in real estate in Boston today must be the hardest job to fail at. I can only imagine how amplified it feels in San Francisco.
> Hiring a street fight. Retention is nearly impossible.I hold a Ph.D. in pure/applied math, have published in AI, optimization, and mathematical statistics (more powerful than current AI/ML), did Ph.D. research in stochastic optimal control (e.g., the field of Bertsekas at MIT, the ORFE department at Princeton, and E. Dynkin at Cornell), have been an expert scientific/engineering programmer for decades, have taught computer science at Georgetown and Ohio State, recently have typed in code for Windows in 400,000 lines of typing. The most recent 100,000 lines are solid, production ready code in .NET and some applied math secret sauce for an ambitious, new Web site, have never been arrested, have held US security clearances at least as high as Secret, have never had a traffic accident since I was a teenager, have not had a traffic ticket in over 20 years. My health is fine, plenty good enough for yard work and office work and with no handicaps. With some applied math and computing, twice as fast one person efforts, one that took 8 weeks and the other that took 8 hours, saved FedEx from going out of business.Early in my career, in one two week period I sent a few resume copies from some ads in the Washington Post, went on seven interviews, got five offers, and soon was making in annual salary six times what a new, high end Camaro cost.I’ve had a resume on Indeed for over a year with no responses of any kind. Before that, in my most recent effort at job hunting, I sent 1000+ resume copies, including many to the Boston area, and got back nothing significant. I’m far and away the most capable of any time in my career but am 100%, absolutely, positively, totally, apparently permanently unemployable at anything much above minimum wage.> Hiring a street fight. Retention is nearly impossible.Tough to take that seriously.
Hi Fred – Great post. There has been a lot of talk / narrative about lyft being over valued and Zoom being a great business. Would you be interested in doing a small series of posts (similar to MBA Mondays) about what goes into evaluating a public company for you?
I’ve been doing that with my S1 Fun posts in the last few weeks
Always good when you get a thematic bit in your mouth!
The earlier the better for all involved. If the Monster Funds don’t like it let them chop the size of their funds by a 1/3 or more.
We are as happy as anyone with the fine state of the IPO markets. In the ten years we’ve been running IPO Candy the market has often been much better than people realized. Lyft and these other companies do make headlines. One bad thing is that the valuations these companies are getting on their first day of trading makes the risk/reward for private investors fairly unattractive. We’ll see where it all shakes out but nobody is “buying low” when you look at where $LYFT is trading now.
I’m sure part of it is the great economy and a business-friendly Administration. I don’t see any great mystery here. Hard to support public valuations in a shrinking or flat economy.
VC funded companies and their investors know we are in the 9th inning. Cycle is coming. Sell high. Momentum game, all that stuff. Will create a frenzy to IPO, and shift the risk to retail investors. Hence VCs being “the smart money”.
This smells like animal spirits Teddy.
Highly plausible analysis. Pass the parcel.
A business with no network effects and which is deeply unprofitable went public at a valuation of ~$23 billion at 10X last year revenues; opened to retail investors day 1 at a 20% premium to the IPO price, and then dropped below the IPO price on the second trading day.
This has a sense of familiarity. 2001: A Valuation Odyssey.
And then a design change showed they didn’t really understand what they were doing, likewise retail investors not understanding how Facebook could and would copy the functionality and take the wind out of the competing company’s sail.
We need a new Standard – Fred Adjusted Time (FAT).Add 4 years.
Never thought I’d see NYC and LA listed as more affordable living options. But true.When recruiting in the SF market for someone to relocate to another market, one of my targets is people who’ve been through an exit. House is paid for and can generate income as a rental.
The reason we’re seeing it now is because everyone wants to cash out before the recession hits. We all know it’s coming and the everything bubble is a bit overdue anyway. With gov debt at all time highs it means we’ll be growing much more slowly after 2022, so it’s now or never.As for more innovation, I’ve always thought the limiting factor on innovation was opportunity rather than capital. Right now we have a vast oversupply of capital hence the huge market/housing bubble we’re in (CAPE > 25). Ultimately, the amount of aggregate investment startups get is a function of the ROI VCs get.
Philly is doing everything in its power to stay not competitive. Its suburbs are nice though.
$200,000 plus some? In a safe community? At current mortgage rates, good if getting paid $120,000 a year in a job that is at least stable and hopefully with some upside and equity growth participation and not so good if getting paid $60,000 a year on a gig.Details aside, the overall situation is easy to see from 10,000 feet up, 50,000 feet up, from orbit: For family formation, the US economy just plain SUCKS. We know that with rock solid certainty because the birth rate is so low we are going extinct, literally, quickly.When my father got out of college, right away he got married, BOUGHT a house, and had a child, my older brother. Soon he moved to a better job, right away BOUGHT a house, had me, and got most of the furnishings I grew up with. Then he got a better job and right away BOUGHT a house. Later he redid his mortgage and put on a third bedroom and second bath, relatively nice, and bought some more nice furniture and a nicer new car. Soon my brother and I shared a car. Mom and Dad paid our tuition to a quite good, private four year college.I have yet to buy a house or have kids. Since what Dad did, the US economy totally sucks. And, even from orbit can see that I’m not the Lone Ranger here — US family formation is a massive failure, SUCKS.NYC? Terrible place to try for form a good family. The place is a black hole of failed family formation.Actually early in my career, in computing and applied math for US national security within 100 miles of the Washington Monument, for some years I was making money enough maybe to buy a house — we considered buying a townhouse. But my wife and I held off on that and children to get two Ph.D. degrees, believing that then we COULD, of course, easily buy a house. Nope. My Ph.D. killed my good career, and her Ph.D. was most of what killed her — no joke. All that education was supposed to help us; my education is the key to the secret sauce of my startup, which so far has yet to make $1 of revenue, and otherwise was wildly destructive to my career.Her Ph.D. was wildly destructive to her whole life: She was Valedictorian in high school and brilliant; she and her life and our marriage would have been MUCH better if she had never set foot again in an educational institution after high school, MUCH better.Now the US is a very, Very, VERY, VERY long way from when Dad graduated from college and, then, easily, right away, slam, bam, thank you ma’am, got married, bought a house, and started a family with a stay at home wife. A VERY long way.The first thing to do is to get housing prices down, Down, DOWN, way, Way, WAY DOWN. For that the first thing to do is to go to areas with cheap land, good weather, and good water. In particular, get the heck OUT of Boston, NYC, Philadelphia, …, Chicago, … San Francisco, Los Angeles — any of the old, big cities and, by the way, any deserts or swamps. OUT’a there.Instead locate in the suburbs of the medium sized cities in West Virginia, Kentucky, Tennessee, Arkansas, Indiana, Ohio, Kansas, ….The next thing to do is to get DOWN local taxes for schools. etc. US K-12 is a grand disaster, really expensive, doing next to nothing at all significant in education, and very, Very, VERY destructive for the kids.For the kids, K-12 is being led by the wrong people the wrong ways in the wrong directions for the wrong reasons and values. For the kids themselves, they are stuck in a social system something like a fight of 100 rabid pit bulls in a mud pit. Did I mention destructive?Bluntly any kid of more than idiot ability can learn the basics of the 3Rs in less than a year. Then watch some videos about history. Then have some more videos on fictional story telling. That should get the kids to about the eighth grade. Then maybe do a little more math and some general science. For both, mostly just watch some videos. Now if want, start on a four year college degree, a two year community college degree, or vocational education.One of the best career directions is a unionized job in the trades, maybe with some vocational education or training program, for a stable company, e.g., an electric utility, in the suburbs of a medium sized city in one of the less wealthy fly-over states. A job based on a lot of education — college, MD, LLB, Ph.D. — in a big city can’t begin to compete.K-12 education is a MASSIVE waste that does more harm than good, and the school taxes are crippling for any community.For the big cities, they are black holes of failures in the economic system and at family formation — LEAVE them.Sure, for San Francisco, there’s no hope. Well, it’s no better in Boston, NYC, Chicago, …. Stay OUT of those places.
Be careful what you wish for Charlie.
Definitely looks that way.I know; I know: For Lyft can take two numbers at each of three points in time and draw a graph that shows that the revenue is growing much faster than losses so that in time out there, if that keeps up, will come a day of quite high pre-tax or some such earnings. IF.
Bingo. I wish someone could plot the total returns of the private pre-IPO money versus the post-IPO public.
Thanks for the detail. I was wondering if it was a SEC-imposed regulation or an industry-imposed practice.
2019 AVI resulted in tax rate increases of 20%-100% for home owners. At the same time, new residential construction is tax abated. Most new construction around Center City is priced >$750k, and really above $1m. The tax subsidy causes higher home prices for 7-8 years of the 10-yr abatement.
I agree on the “get dicey” part. Here are a few points we sent out just before the IPO:Q2 results could be weaker than expected. A lot of drivers work for both Lyft and Uber. They will tell you it’s a must if you want to survive in the business. Drivers know that IPO bonuses are based on the number of rides they have so now they have an extra incentive to ramp up Uber rides to qualify for that bonus and the clock is ticking.Multi-modal is just a story. This term refers to using multiple modes of transportation to make a trip. The base case is using a short-leg at the beginning to connect with mass transit and then another short-leg at the end to connect to your final destination. It can also get more complicated when you factor in commercial travel options. Lyft pictures doing this in all kinds of use cases including some involving bikes and scooters. They are not even close to having anything working in a practical sense. I don’t believe the company even knows how hard this problem will be to solve, let alone pull it off. During the 1980’s I worked on this problem with companies including IBM, Union Pacific Railroad, Maersk andAmerican Airlines. It’s almost intractable.Scooters and bikes are shaky prospects. Most people who live in a city have witnessed the sudden proliferation of electric scooters from companies like Bird and Lime. But in many places they have become a running joke as drunken, helmet-less customers joyride them around on sidewalks and against traffic. The real question though is can this mode of transportation be profitable at the current pricing – nobody knows. There’s a reason bike-sharing programs are sponsored by big companies and run by municipalities – they don’t need to be profitable and provide investors with a high return.
Yep, we incentivized / subsidized housing and now it’s an albatross. It truly has destroyed family formation.
Guessing here, before S1 gets raked by smart $ people:Which of these is a likely Hindenburg?161571Which of these is waaaaaaaay overvalued?1442Which of these is overvalued?171293Which of these is not a business at all?11Which of these is POSSIBLY a decent retail investment?13 PINTEREST (maybe)10 ZOOM (likely)8 VERTIV (maybe)6 CLOUDFLARE (almost for sure)5 CROWDSTRIKE (likely)
Albatross? Maybe so; in some places, certainly. In some cases, otherwise some people would be sleeping on the streets.I never said “incentivized / subsidized”, and Dad never had any of that.Basically our economy just SUCKS.My guess is that we started sucking with our fight in Viet Nam, inflated the economy, burned so much oil, say, in B-52s, we enabled OPEC where we had been paying them ~$0.25 a barrel, kept sucking as the 22% interest rates killed the S&Ls, kept sucking in Gulf War II and Akrapistan.Let’s see:7 * 10**12 / 200,000 = 35,000,000so that the $7 T we spent just in Iraq and Akrapistan would have built houses for about half of our families — what we wasted in Viet Nam, etc. would have built most of the other half. What was wasted in bad trade deals would have done still more.Who paid? WE did. However you add it up, from whom, for what, to whom, we ruined family formation on absurd foreign adventures, trade deals, etc.Oops, we also blew it on the housing bubble that burst in 2008.Starting with Viet Nam, we shot our economy in the gut and haven’t fixed it yet.
Yes, but it pumped up Japan’s economy, which was probably the geo strategic aim of the Vietnam action. Someone should research the accounts of the DOD and Pentagon for that period to discover the total value of business contracts with Japanese corporations (Zaibatsu). HUGE! The Japanese ‘economic miracle’ was build on it, and after 1975 it it slowly stalled.
Maybe so, but there’s an issue there for Japan or most of the larger economies: Some worker works really hard, gets paid in the local version of money, produces stuff, and his company/country export the stuff and get paid in another version of money.To be simple, “for the sake of definiteness”, the worker got paid in Yen, and his company and country got paid in dollars.Then to pay the worker the Yen, some of the dollars got sold on the international currency exchanges.Right away the worker can suspect –What the heck was all the sweat, strain, lost sleep, commuting 3 hours a day, etc. good for?I got paid in Yen for work output that was just shipped outside of Japan, i.e., I worked in steel, but it never built a house or car used inside Japan (instead was destroyed in some jungle in Viet Nam). So as far as I and Japan are concerned, Japan could just have printed the Yen while I was resting on a beach on the Pacific.Then someone says that printing the Yen without corresponding productivity could cause inflation in Japan. Yup, and in particular, if the US needed much more of the worker’s steel, the worker, his company (IIRC Mitsubishi), and Japan could have doubled the worker’s pay which the worker would have spent in the Japanese economy — overheated, and causing inflation — just as well, so far in the argument, essentially the same inflation.Then in this 2 AM bull session, someone notices that Mitsubishi and Japan got paid in lots of green US dollars. They don’t get spent directly by that worker in Japan but they (A) get sold for Yen, thus, lower the value of the dollar and increase the value of the Yen and/or (B) let Mitsubishi buy, that is, import, stuff, maybe iron ore, tools the worker used, oil, etc.Well, net, of those dollars, Japan got (i) a more valuable Yen for anything they want to buy and import and (ii) maybe some imported oil the worker can use in his motorbike.Looks to me like something is wrong with the arithmetic here: That was a HECK of a lot of work and work output from the worker and Mitsubishi for some motorbike oil. For the tools for the Mitsubishi plant, they were used just for the stuff destroyed in Viet Nam and in the short term did little or no good for Japan otherwise. For the iron ore, similarly — the steel went to the jungles.Broadly, why the heck should a county work hard and then export the results of the work? Well, if they don’t have any oil and desperately need oil, don’t even have coal to use to make oil, etc., but this argument looks thin.So, maybe here is some of what was going on, CAPEX for Mitsubishi: So, Mitsubishi had lots of green dollars and went to the US — and Germany, Sweden, etc. — and bought the best industrial tooling, computer aided design products, numerically controlled machine tools, laser measurement devices, welding robots, etc. and used them to produce cars sold both in Japan and also exported so that Japan could import more — oil, industrial and consumer goods, etc.Or, net, Mitsubishi got green dollars for CAPEX for imported industrial infrastructure that got them on their feet as a world class industrial company. As we know, here in the US, it’s easy enough for an industrial company to need ballpark $1 million in CAPEX per worker job. So, getting that CAPEX usually is one heck of a struggle.So, for the war in Viet Nam, the US printed dollars and gave them to Mitsubishi for products destroyed in the jungles. Mitsubishi spent some of those dollars on CAPEX that let them make cars that put much of Detroit out of business. And as Mitsubishi bought equipment in the US, with those printed US dollars, they helped inflate the US economy, raise interest rates, make it harder to buy a house, and hurt US family formation.All that said, there are problems: One problem is that near 1900 or so, the grand Poo Bahs in Japan decided that Japan should industrialize. Then they did so very quickly, were able to have the big naval battle with Russia, the Battle of Tsushima in 1905.So all the worker, company, country get for the efforts of the worker/companies is some foreign exchange for CAPEX.Maybe that’s much of why after Viet Nam Japan went through so many years of slow growth — no more big orders from the US for stuff to be destroyed in the jungles.For foreign trade, I can see some of it: E.g., tin, natural rubber, teak, cinnamon, black pepper the US doesn’t have. So, we import such stuff and pay them with cars, computers, machine tools. Fine.But somehow such trade is only a little of what’s really going on.Did I mention that Viet Nam, Gulf War II, Akrapistan, and bad trade deals, e.g., hundreds of billions a year of trade deficit with China, some (????) hundreds of billions of trade deficit with Mexico from importing illegal drugs, etc., have shot the US economy and US family formation in the gut?I know; I know; I know; JFK, LBJ, Nixon, Ford, W, Obama all believed that the US had much more important things to do in jungles, rice paddies, and deserts far outside the US than have family formation in the US bloom.As I recall, Ike tried hard to keep the US OUT of “a land war in Asia” and noticed that in absurd foreign adventures each soldier’s life and each dollar for a bullet, etc. was stolen from the American people and wasted in nonsense.Again, all details aside, as we can see even from orbit, we’re doing so poorly at family formation we’re going extinct. That’s the worst case of a grade F of all.All the way back there, I thought that if all the economists were lined up end to end, it would be a good thing. Now I see that we should include politicians and lawyers.Back to my startup — download a fresh copy of SQL Server!