WeWork’s dramatic fall from grace, which saw its valuation fall from $47 billion to a reported $8 billion amid an IPO fiasco, was just one example of a larger reckoning on newly public companies — and a wake-up call for those thinking about an IPO.
Uber and Lyft alone have seen around $40 billion in market value disappear since their IPOs this past spring. Other newly public companies including SmileDirectClub, Peloton, and Slack similarly saw their valuations fall well below their opening day price.
Investors also trimmed the valuations of companies in the Pacific Northwest that went public since 2018. After peaking in August and September, shares of Adaptive Biotechnologies fell 51 percent, Smartsheet tumbled 22 percent, and Avalara and nLight are both down 17 percent. DocuSign, which was founded in Seattle before moving its headquarters to San Francisco, bucked the trend with a 23 percent gain following a recent low in August.
What does this all mean for the next crop of startups with high valuations that might go public?
On the GeekWire 200, our monthly ranking of Pacific Northwest tech companies, several companies have earned the unicorn moniker with billion-dollar-plus valuations. They include Outreach, OfferUp, Convoy, Auth0, Icertis, and newcomer Vacasa, the Portland, Ore.-based vacation rental startup that joined the cohort this week with a $300 million round. Dog-sitting startup Rover and remittance company Remitly are also close to the billion-dollar mark.
We spoke with analysts, CEOs, investors, and others to learn more about the IPO outlook for 2020.
Safer on the sidelines?
Bill Bryant, a Seattle-based venture partner with Threshold Ventures, accurately predicted that 2019 would be a quiet year for public offerings in the Seattle region, since investors are increasingly demanding higher revenues and growth metrics that few companies can satisfy. Adaptive was the only company to go public this year, and though its stock doubled on the first day of trading, shares have since settled to 30 percent above the initial offering price.
Following WeWork’s saga, investors will be more inclined to “look behind the curtains” of high-valued startups, said Greycroft founding partner Dana Settle at the GeekWire Summit earlier this month. “Going forward there will be a lot more scrutiny on business models and not just product-market fit,” she said.
Even enterprise software companies can expect more pressure from investors to show how they will become profitable, said Paul Condra, an emerging technology analyst at PitchBook. “If you don’t need to go public, you can just sort of wait for the waters to calm down a little bit,” he added.
Less than a quarter of this year’s IPO class was expected to report positive net income, according to Goldman Sachs. That’s an even smaller share than were profitable in the lead up to the dotcom bust.
The upshot is that a third of unicorn-level startups have priced their IPO shares below their most recent private funding, according to PitchBook.
The 2020 presidential election may also put a damper on mega-IPOs in the coming quarters.
“Historical data tells us that uncertainty caused by U.S. elections tends to have a slowing effect on IPO activity, and the speed of pickup for the post-election IPO cycle also depends on the state of the economy and growth,” said Tim Tasker, the Seattle managing partner at Ernst & Young.
But Bryant predicts more activity in the near future. He expects 2-to-4 Pacific Northwest companies to test receptivity in the public markets in the next 12-to-18 months. He said there’s a group of six or so startups that “fit the profile and are in large enough markets to be enduring public companies.”
“There’s just too much pent up value in companies that have been private for 6-to-10 years and are well in excess of $100 million in revenue,” he said. “They have sustained growth and proven unit economics as they scale with strong gross margin profiles.”
Unicorn CEOs unfazed
Since Amazon was founded in 1994, 32 startups in the Pacific Northwest have become unicorns, according to an analysis by Dan Li of Madrona Venture Group. Companies such as Convoy, Auth0, and Outreach hit the milestone after raising triple-digit investment rounds this year, and others on the GeekWire 200 could get there soon.
There is some evidence that sky-high private valuations don’t translate into public company success. Startups that raised more than $100 million pre-IPO saw their shares gain far less than startups with smaller venture capital backing, according to an analysis by CB Insights.
But CEOs of highly valued startups in the Pacific Northwest said that headlines proclaiming “unicorn blood in the streets” didn’t affect them.
“I don’t care exactly what our status is, unicorn or not,” said Dan Lewis, CEO of trucking startup Convoy, when asked at the GeekWire Summit. “The way the trucking operates today is inefficient. It wastes time, it creates a huge amount of extra unnecessary emissions. There’s a lot of additional costs. Facilities are crazy getting in and out. And technology and data will make that better.”
Manny Medina, CEO of sales automation startup Outreach, said: “The word unicorn is just being overused right now because anybody with a high, inflated valuation can qualify.” He added that artificial intelligence and automation technologies are “delivering real dollars.”
Software companies have a long track record of flipping losses into large profits due to high gross margins, said Matthew Kennedy, senior IPO market strategist at Renaissance Capital. “The recent group — WeWork, Uber, Lyft — they just don’t have that proven model,” he said.
And despite the troubles of some tech firms, the market conditions for public companies are still very positive. The S&P 500 hit a new high just this week and the valuations of publicly traded companies overall are likewise high.
“I think there’s plenty of companies that would be happy to go public at what the market is willing to pay,” said Kennedy. “I don’t think they would be smart to be too much greedier or to wait for market conditions to improve.”