Why do 'Unicorns' go public?

James Penn
May 24, 2019

Uber Technologies, the ride-hailing company that has become an increasing part of many peoples’ lives over the last five years, finally listed on the US stock market last week. The valuation didn’t quite hit the heights that many people had expected last year, or earlier this year. The company was valued at $79bn in the IPO, only a little above the $76bn that it was worth in August last year, the last time an external investor (in that case the car maker, Toyota) put money into it.

Yet late last year, investment bankers in the US were suggesting that it could be worth as much as $120bn in an Initial Public Offering (or ‘floatation’ as we call it over here). Even so, it was among the 10 biggest IPOs of all time. The amount raised – at $8.1bn – is the biggest amount since Alibaba floated in 2014. Uber becomes the latest in a line of so-called ‘unicorns’ to list in the United States. Recent high profile listings include Lyft (another ride-hailing tech company), and Pinterest (a social messaging, or picture exchanging site, a bit like Instagram). Lyft was valued at an astonishing $24bn when it listed a few weeks ago, but the shares have lost some of that premium since then. After floating at $72 a share, at the time of writing they were trading at $54.

The term ‘unicorn’ was coined in 2013 and refers to a high growth tech start-up in private ownership, which also happens to be valued at $1bn or more. Other ‘unicorns’ expected to list on the stock market later this year are AirBnB, the house letting/rental company, WeWork, which ‘provides shared workspaces for technology startup subculture communities’, and Palantir, an American software company that specializes in big data analytics. Other reasonably well-known names (at least in tech circles) which also come under the banner of ‘unicorns’ include Ant Financial, the Chinese investment advice website partially owned by Alibaba, Stripe, a payments business, and DiDi, a Chinese ride-hailing, internet-based service.

There are now said to be 297 ‘unicorns’ in existence, according to Wikipedia, 128 of them in China, 99 in the US, and 24 in India. We have a few of them here in the UK, with Deliveroo and Oxford Nanopore perhaps being the best known.
Does a ‘unicorn’ cease to be a unicorn when it has finally left the hands of private equity and become a public company listed on the stock market? Likely not. Uber, Lyft and their like will doubtless continue to be known as such in the future (at least as long as they retain their growth cachet and the prospect of rapidly higher revenues).

So why are they listing now, and why IPO in the first place, when none of them have had trouble raising capital on private markets? The reason for listing now is in all probability buoyant markets. Stock markets have bounced, and there is a strong appetite for genuine growth companies (or those that can consistently grow the top line in a low growth environment), even if they are losing money. The reason for going public at all is more debatable, given there are plenty of private equity investors who would likely continue to fund them in the low-interest environment. But the unicorns are still losing money (some of the large amounts of it – Lyft recently announced first-quarter losses of $1.5bn, while Uber lost $3.3bn last year on $11bn of revenue), and, assuming the losses continue and need funding, it is generally easier to raise to raise money in public markets than private ones.

What about valuation? John Thornhill in the FT recently wrote a piece for the FT in which he wondered if, in relation to the unicorns, the stock market is guilty of ‘excessive long termism’, rather than the short-termism it is usually criticized for. His point was that losses are potentially being tolerated for too long, and, at the current rate, threaten to become endemic. He put the case that, ‘massively lossmaking, venture capital-backed companies seeking to cash out on the public markets near the top of the cycle should probably be avoided like drunk drivers on a Saturday night.’ He went on to say, ‘Lyft and Uber look more like philanthropic organizations, extracting money from rich VCs and subsidizing urban transport for millions of users.’

The counter-argument is that the unicorns are older, bigger and generate more revenue than some previous ill-fated tech IPOs. Crucially, they have more scale and are usually the dominant company in their sector. At present, there seems to be no limit to the way in which ‘disruptors’ are valued on the stock market.

Disclaimer: The views thoughts and opinions expressed within this article are those of the author, and not those of any company within the Capital International Group (CIG) and as such are neither given nor endorsed by CIG. Information in this article does not constitute investment advice or an offer or an invitation by or on behalf of any company within the Capital International Group of companies to buy or sell any product or security.

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