“Many of their business models have not been tested fully,” Ilya Strebulaev, a Stanford University business professor who studies late-stage startups, said of the large private companies. “I would not be surprised if many of these companies would not be as successful as investors expect them to be.”
Of the five companies with the largest losses before an IPO, four of them—discount marketplace Groupon Inc., biotech Moderna Inc., social-media company Snap Inc. and communications company Vonage Corp. —have performed poorly on the public markets. A fifth, Viasystems Group Inc., went private years ago at a fraction of its IPO value.
For investors betting on the coming IPOs, the main appeal is rapid growth, which Lyft has made a centerpiece of its push to Wall Street. Its revenue doubled last year to $2.2 billion in what would be the third largest annual revenue of a U.S. startup pre-IPO, behind Facebook Inc. and Google, according to Capital IQ. Both Facebook and Google were profitable before their IPOs.
Lyft hasn’t publicly outlined when it hopes to turn a profit, but company executives and bankers point out that spending on high-cost items like marketing is falling as a percentage of revenue. It is also pushing to reduce insurance costs.
There is nothing that signals late cycle activity quite like a slew of IPOs from companies that have little prospect of turning a profit.
The only way companies like Lyft and Uber are going to turn a profit is if they are the first the deliver autonomous driving and that is an unlikely prospect. Los Angeles Uber drivers are going on strike for higher pay, not least because they don’t get paid for sitting in traffic. That helps to highlight the challenge the company has in delivering the profits investors so badly want. It is impossible to retain a cost advantage over taxis if you pay drivers the same wage as taxi drivers.
The additional slug of new issuance these IPOs will represent will act as at least a partial counter balance to share buybacks which is a headwind since it should increase supply.