Failed IPOs: General Insights
Five insights namely inflated valuation (greed), corporate governance, undervaluation of shares, losses, and traditional IPOs, are provided and discussed below. The insights also provide some company examples, economic impacts, and a notable moment of history. The findings also concluded that there had been an increase in the number of failed IPOs over the past five years.
Inflated Valuation (Greed)
- One of the insights into why IPOs of tech companies fail is because of how they overvalue their shares when they blow out. In this era of getting information at one's fingertips, investors can be very conversant with the actual worth and achievements of a company. As a result, investors tend to be very skeptical when companies set down prices for their shares.
- The riding-share company, Uber, is a good example. For a company that had never been under the examination of public markets, it ought to tread carefully on its expectations.
- The ride-share giant placed a very greedy value on the company with over $100 billion in valuation for its IPO offering. Following the first day of trading, its valuation fell short to $76 billion. Even after the stock recovered, the price is still below the IPO offer of $45.
- Now, the economic impact is that confidence in the company's stocks is being eroded as it recently suffered a $5.2 billion loss.
- Another economy impact arising out of this would be a plethora of litigation cases — a class action most likely. For instance, Lyft — a ride-sharing company was sued by angry investors for being misled by an inflated IPO share price.
- Another insight is the issue of corporate governance of many tech start-ups. Due to inadequate supervision, many founders of these companies have squandered venture capital cash injections into the business. As a way out of the financial mess created, they start looking for a new investment package in the form of an IPO.
- A good example is WeWork. This company had to postpone its IPO after the inflated valuation of its IPO offer backfired. This followed the realization that its chief executive had become a worry for investors.
- It was discovered that the company's debt is now deemed 'distressed' and its liabilities to property owners is worth $47 billion. All future development of the company has been put on hold, and a minimum of one-third of its employees would be out of jobs.
- Presently, the company's operating capital cannot see it through the next 12-month calendar and without the IPO, WeWork will face serious difficulty to raise money any other way. If this happens, it will hurt the economy as the company's workforce of 15,000 would be left unemployed.
- Another economy impact is the growing fears that the consequence of hindered demand may result in a property recession.
Undervaluation of Shares
- It is not only an inflated valuation of a company that can result in a failed IPO for tech companies; undervaluation can be disastrous as well.
- For a company to succeed at its IPO, the valuation of the company must be put in balance and accurately nailed on the head by adequately relating with brand's market size at the moment of offering IPO.
- Today, Twitter's stock is valued at $39.07, but a notable moment in history was when the company went public (2013). Its IPO was undervalued at $26 per share, rather than its valuation price of $45 a share.
- As a result, the company lost more than a billion dollars. It was a tragedy because the company had never earned that much revenue during that time. More so, it is trading today at a price less its expected valuation at the initial public offer.
- While investors may be patronizing the IPOs of non-profitable companies, the public market does not put itself on a similar page. The former usually hold the belief that the rave of technology can bankroll the future growth of tech companies and can, therefore, tolerate current perpetual losses.
- In 2018, the percentage of tech companies in the US that didn't make a profit and went public was a staggering 83%. Unfortunately, profit matters.
- Again, Uber is a practical example of a company that wasn't making a profit but decided to go public and the same can be said of WeWork. Uber doesn't have a business model that can yield successful revenue.
- On the other hand, Zoom Video became more valuable "than any other tech company to go public this year" after it began trading publicly. The simple reason behind this is because it was profitable before offering its IPO.
- When a brand is big enough, it is advisable to bypass the traditional IPO and get listed directly. Doing so will save a lot of costs. Many tech companies that are not profitable get to spend over $100 million going through the traditional IPO route.
- For instance, Uber spent over $100 million for a traditional IPO because they had to pay a minimum of 29 financial institutions.
- However, a company like Slack that went through direct listing only paid $22 million. The company paid only three financial institutions.
Increase of Failed IPOs in the Last Five Years
- There has been an upshot in the numbers of IPOs issued in the US from 2016 to 2018, although there was a decline between 2015 to 2016.
- In 2018 alone, the percentage of tech companies in the US that went public without being profitable stood at 83%. In so far as the majority of tech companies are going this route, it has become a trend.
- Industry reports state that the "credibility of investment-bank valuations in loss-making companies" has been damaged. Thus, there is no point of an early exit for investors who intend to capitalize on it. This implies that there was still credibility in this process some few years back.
- Having established above that profit matters before going public, an increase of failed IPOs in the last five years is more likely.
- More so, there are many companies valued with over $1 billion IPO that is recently underperforming in the public market as a result of share price decline in their IPOs. Some of these tech companies include ZTO Express, Genuity, Shanda Games, ADT, and Uber.
- Analysts have also reported many IPO failures in recent times. According to a report in the Financial Times, the reason the market is growing is attributed to IPO failures. Therefore, it is safe to conclude that there has been an increase in the number of failed IPOs over the past five years.
We started our findings by examining market reports and analysts' remarks towards finding underlying insights into overvalued tech companies/failed IPOs. After concise research, we were able to identify five comprehensive insights into overvalued tech companies/failed IPOs. For each insight, we described and explained using hard data, analysis, and examples, as appropriate.
Through the careful analysis of the market, we were also able to determine that there has been an increase in the number of failed IPOs in the last five years. The report in the Financial Times backs this conclusion.
We also provided company examples like Uber, WeWork, and Lyft, a notable moment in history like Twitter's IPO, and some economic impacts arising out of failed IPOs.