Two of the most-anticipated initial public offerings (IPOs) of the year have not gone exactly as planned, but what does that mean for other marketplace-style startups in the freight and mobility tech space?
Ride-hailing companies Lyft (NASDAQ: LYFT) and Uber (NYSE: UBER), both high-growth and high-loss, turned to public markets to raise equity capital and extend their runways.
Now both names are trading at valuations below their last venture capital raises. Lyft went public at $72/share and popped to $78 before plunging to $48.15 as of the morning of May 14, an implied market capitalization of $13.76 billion against its post-money valuation of $15.1 billion in June 2018. Uber’s road show started off seeking an aggressive $120 billion valuation, but management ultimately decided on a $75.4 billion valuation at $45/share. This morning UBER was trading at $37.45/share at an implied market cap of $62.8 billion.
The difference in how private and public markets valued these two companies made FreightWaves wonder what the implications are for other market-based freight tech startups like Convoy and Flexport. If Lyft and Uber are still trading below their previous venture capital (VC) valuations when the lock-up period – typically 180 days – ends, the late-stage VC investors who participated in those rounds may take a loss.
“What we’ve seen recently with the post-IPO performance of Uber and Lyft, I’m a little bit on the fence about it,” said Chris Stallman, Partner at Fontinalis, a Detroit-based venture fund focusing on mobility technology. “It signals a slight breathing period – these valuations did get up there a little bit, but it really doesn’t change the game of the venture business.”
Fontinalis invested in Lyft and is an investor in FreightWaves.
Stallman called out Facebook’s 2012 IPO as an example of an equity sale that went poorly at first, marred by glitches at NASDAQ. The company closed below its IPO price in its second day of trading. The IPO was widely considered a disappointment by the press but shares of Facebook have increased in value more than 10-fold since then.
“Did their valuations get too far out ahead of the skis? I’m hesitant to judge on such a short time window,” Stallman said.
Companies that raise mega-round after mega-round are taking on a lot of dilution, Stallman said, and making their outcomes more binary. A company that achieves a $1 billion valuation relatively early in its product development or market penetration is then under pressure to double that valuation in the next round. Late-stage venture capital has become crowded by the entrance of the Softbank Vision Fund and other crossover investors from the hedge fund and mutual fund worlds.
“What we’ve seen a little bit from a mentality standpoint is this – early-stage, everyone has the right intentions, they’re thinking about founder and overall picture, momentum builds, and somewhere along the line people stop thinking really critically and start becoming momentum players,” Stallman explained.
Stallman said if Uber’s and Lyft’s last round of investors get burned, then it might take some late-stage demand out of the venture capital marketplace. Investors who have helped fill out some late-stage mega-rounds in the hopes of making an IPO arbitrage play may be starting to realize that is not quite as robust an opportunity as they thought.
Another venture capitalist, who spoke anonymously by telephone, largely agreed with Stallman – it’s still early, but a bad outcome for late-stage investors could affect that portion of the market.
“It’s too early to tell,” said the investor. “There’s very much an understanding that VC dollars are subsidizing the unit economics of what these businesses are doing.”
The VC partner said that the proliferation of mega-rounds has pushed back the goalposts for early stage exits to 10 and even 12 years. That longer time horizon – and the quite large valuations that mega-rounds are contributing to – have sparked activity in the secondary markets.
Employees and early investors who may want to take some chips off the table can sell their shares in a startup to a secondary investor. It limits their upside, but it also takes away the downside if the startup folds before an exit or the shares tank on the public market through the lockup period. Early-stage investors will always see plenty of upside after a VC-backed startup goes public, but middle-stage investors and employees may want to tap secondary markets if they believe a company’s valuation has gotten too large.
“Maybe we see less funding at the unicorn stage, a massive rise in secondaries, and a lot of chips taken off the table” in the mega-round run-up to an IPO, the investor predicted.
