Uber didn’t kill the IPO market

2019 hasn’t been a magical year for unicorns.

Multi-billion dollar startups that have raised money from Silicon Valley and other venture capital investors around the globe have struggled as they graduated from hot private companies to publicly traded stocks on Wall Street.

Uber (UBER) was a flop, falling in its eagerly anticipated market debut. Uber (UBER)’s top US rival Lyft (LYFT) has struggled as well. China’s Luckin Coffee (LK) had a solid debut but has faded since. And Pinterest (PINS) has been tumbling since poor earnings.

The market is about to go into the IPO doldrums for a bit, with no major offerings expected until Slack’s direct listing in June.

But the recent weakness isn’t necessarily a bad sign for Slack — or Airbnb, WeWork or other high profile private unicorn companies that are expected to be considering IPOs later this year or in 2020.

Uber logos top trading posts on the floor of the New York Stock Exchange, Friday, May 10, 2019. The world's largest ride-hailing service reached a major milestone Thursday when Uber priced its long-awaited initial public offering at $45 price per share to set the stage for its stock to begin trading Friday morning. (AP Photo/Richard Drew)

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It may seem that investors no longer have an appetite for unicorns — unless they sell plant-based food. Beyond Meat continues to soar. The stock rose 7% Thursday to nearly $105 a share and has more than quadrupled from its offering price.

But dig deeper and you’ll find that several other recent IPOs have also done well beyond Beyond Meat. They just may not be generating as many headlines, partly because they cater more to big corporate customers instead of average consumers.

Software companies succeeding while consumer companies flop

For example, shares of web conferencing platform Zoom Video (ZM) and incident management cloud software company PagerDuty (PD), each of which went public in April, have more than doubled from their offering prices.

It’s no surprise to see lesser-known software companies thrive as public companies, because they tend to generate steady revenue streams from licenses, noted Frederic Kerrest, chief operating officer and co-founder of Okta (OKTA), an identity management software firm that went public in 2017. Okta (OKTA) works with many of the recent companies that have gone public.

“Success in the public markets is about predictability. Wall Street loves the subscription model,” he said.

That’s why Slack and Cloudflare, a web optimization software firm said to be considering an IPO later this year, will be worth wataching, Kerrest says. Cloudflare could fetch a valuation of $3.5 billion.

Still, the tepid performance for Uber and Lyft may scare away some other unicorns from going public anytime soon, said Kelly Rodriques, CEO of Forge, a company that lets investors (including employees) of private companies sell shares before an IPO.

“Companies may now be set to stay private a little longer. We’re not seeing another big wave of IPOs,” Rodriques said.

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But it may be premature to declare that this year’s buzzy IPOs are failures just because of a few months (or weeks) of poor performance. After all, Facebook famously flopped in its first few months as a public company and is now — despite its current problems — one of the most valuable firms on Wall Street.

“When you look at Uber, Lyft, Pinterest and other well-known brands that went public, it may be too early to tell how well they are doing,” said Alex Castelli, a managing partner at advisory and tax firm CohnReznick. “The real value may be created over time. There was a lot of hype going into those IPOs and it’s difficult to manage those expectations.”

But Castelli concedes that many newly public companies are struggling to adapt because Wall Street investors are less forgiving when financial results miss forecasts. They tend to be less patient too.

“In the case of Uber and Lyft, there a lot of capital needs and big investments. That’s led to questions about the business model, how they can become profitable and when,” he said.

Translation: Companies looking to go public need to prove that they can start making money sooner rather than later.