“If you didn’t come to party, don’t bother knockin’ on my door.” That is a line from the classic Prince song 1999, which also contains the line “Two thousand zero zero party over, oops, out of time.”
The Prince song was released in the early 1980s. The actual year 1999 was an epic party for Silicon Valley, as venture capital firms cashed out for huge paydays via IPOs (initial public offerings) at the height of the dot-com bubble.
More than $108 billion was raised on Wall Street via 1999-vintage IPOs. The following year, 2000, was indeed “party over, oops, out of time” as the Nasdaq topped in March.
Twenty years later, we are seeing echoes of 1999 in a new profitless IPO boom. This time, venture capital firms are “partying like it’s 2019” as a slew of long-awaited unicorn IPOs finally hit the market.
Wall Street analysts expect the 2019 IPO haul to be larger than the $108 billion raised in 1999, but via far fewer companies sporting far larger valuations. Because the unicorns of the 2019 IPO wave have been private for many years, they have already digested countless billions in venture funding.
And most of these companies are losing money hand over fist. They are all but shoveling cash into a furnace as fast as they can go. The old joke was that building a billion-dollar company is easy: All you have to do is sell dollar bills for 50 cents. It is no longer a joke, though, as that seems to be the actual modus operandi for most of these companies.
Take Lyft for example, the highest profile 2019 IPO to-date. Lyft lost $911 million in 2018, which is a record-busting sum to have lost for any U.S-based company going public. The $911 million loss came on roughly $2.2 billion in revenue which, in effect, means Lyft was selling dollar bills for 59 cents.
The idea, of course, is that Lyft will one day be profitable. But how far off is that day? Two years? Five years? Ten? Nobody really knows.
When Bloomberg reporter Eric Newcomer asked the president of Lyft if the company would be profitable in five years, this was the response:
“We cannot talk about the future, but what we can tell you is that we have set ourselves up to deliver long-term shareholder value.”
The “future” for Lyft is a competitive landscape so brutal it might as well be a knife fight on the docks. Lyft is locked in a permanent battle with Uber, a company valued at four times its size because, while Uber and Lyft have roughly a 60/40 split of the U.S. ride-share market, Uber is also global.
Meanwhile the business models of Uber and Lyft are existentially threatened by the rise of self-driving cars, with competitor Waymo (the self-driving car unit of Alphabet, which is also the parent of Google) valued at $175 billion by Morgan Stanley.
Because of the cutthroat dynamics that intersect across the ride-share industry, the self-driving car industry, and the wide array of consumer delivery competitors both direct and indirect, it’s a non-trivial possibility that Lyft and Uber never become profitable at all.
Yet Lyft just went public with a valuation above $20 billion, in an IPO more than 20 times oversubscribed, and Uber (another perennial loser of billions) is set to follow.
And Lyft is a small fry in the ranks of 2019 cash-burners. The champion here has to be the China-based startup Meituan, which loses so much money it will blow your mind. The following was reported on March 19 in the Nikkei Asian Review:
“Chinese online-delivery service Meituan Dianping has hit a wall in just the half year since going public, joining a host of startups in the country that have lost steam after debuting on the stock market.
Meituan last week reported a net loss of 115.4 billion yuan ($17.2 billion) for 2018, as its touted purchase of bike-sharing giant Mobike turned costly due to major restructuring.”
Meituan does everything from food delivery to bike-sharing to event-ticketing, and it apparently loses enough money to bankrupt Bill Gates. This is another knife fight on the docks with no end in sight, as Meituan appears to be in a life-or-death battle with the juggernaut Alibaba.
There are at least seven more big-ticket IPOs on deck for 2019, with Uber the biggest of them all. Of these seven companies, only one (Cloudfare) has ever shown an annual profit — and that might have been a fluke.
For each of these companies, the rationale is the same: Grow as fast as possible today, don’t worry about profits until tomorrow. Fight off the competition now, roll out a sustainable business model later.
Defenders of this approach point to Amazon, which was also unprofitable at the point of its IPO. But Amazon was self-funding within six years of going public, whereas most of these companies are far older — and still losing eye-popping amounts with no end in sight.
Amazon was also a true pioneer in the e-commerce landscape, whereas the 2019 cash-burners have deep-pocketed competitors all doing the exact same thing.
Why are investors buying these companies? A charitable interpretation might be that 1999 was a long time ago — 20 years now — and the market has a short memory, so investors are repeating a cycle.
Except you don’t have to go back to 1999. There are plenty of examples from the past few years alone of cash-burning IPOs that made no sense to buy. Consider the following examples from more recent history:
- If you had bought Twitter (TWTR) on the closing print of its IPO in November 2013, you would still be underwater in 2019 (and at one point would have been down nearly 70%).
- If you had bought Snapchat (SNAP) on the closing print of its IPO in March 2017, you would be down more than 50% two years later (and at one point down almost 80%).
- If you had bought Dropbox (DBX) on the closing print of its IPO in March 2018, you would be underwater roughly 24% one year later.
Twitter, Snapchat, and Dropbox were all tech darlings. All had brutal competition (and still do). All have delivered ugly losses to the investors who bought in on IPO day — with real ongoing potential for those losses to get worse.
And if anything, the competition facing the 2019 crop of profitless IPOs is even more brutal, with the losses far larger. To quote Biff Tannen from Back to the Future: “Hello, McFly?!”
Yet if the LYFT debut was anything to go by — a price surge as much as 23% on IPO day — public market investors are still clamoring for these booby-trapped cash-burners. Why?
It doesn’t really make sense, except in the context of human nature. When you remember the impact of emotion — factors like fear and greed and FOMO, the “fear of missing out” — the picture becomes clear. An awareness of the past also helps. The history of financial markets, going all the way back to medieval Europe and even Roman times, is one long roller coaster of manias and panics, booms and busts.
Investors spend most of the time being rational. And then, every so often, they go a little crazy. The new “year of profitless IPOs” (2019) is starting to look like one of those times, with uncomfortable parallels to 1999.
Just remember that, after 1999, it was “party over, oops, out of time.” Be careful out there.