If there’s anything to learn from IPO’s in 2019—from Lyft and Uber’s already released S-1 filings to rumours that Pinterest and Postmates will go public—it’s that it is looking to be a big year for money-losing tech companies.
Losses are the new normal for companies going public, reports the Wall Street Journal, with 83 percent of IPOs in the US happening within the first three quarters of 2018 losing money in the prior 12 months. The biggest reason that unprofitable companies are raising money is to quickly get a lot of cash and instead of doing another round with investors (who might be tired of giving the company money), they can sell shares to get cash on better terms.
Lyft and Uber
Investors in this year’s wave of IPOs are already proving how comfortable they are with big losses: Lyft recorded a net loss of $682.8 million in 2016, $688.3 million in 2017 and $911.3 million in 2018—an average of $1.47 a ride, has never had a profit, but has raised $4.9 billion over 19 rounds.
Uber delivered an astounding five billion trips between September 2017-2018, according to its S-1, but still managed to lose $1.5 billion in 2018. It’s raised $24.2 billion over 22 funding rounds, but admits that it expects operating expenses to increase drastically and that it “may not achieve profitability.”
Though it’s mostly known as a trendy image-sharing startup, Pinterest has been under the radar for IPOs as it attempts to double down on its losses. It reported Q4 net income of $47, but still lost $18.8 million, down from $35.7 one year ago—but it managed to grow its revenue from $472.9 million to $755.9 million, astounding by any measure.
Pinterest is different in gearing up for its IPO in that it’s not losing nearly as much as other companies, and it is closing down the narrow gap between profitability quickly.
Why IPOs lose money
Investors are willing to buy in the present in order to subsidize and grow a company that could make a lot of money down the road. They’re willing to believe that losses from the likes of Robinhood, Slack, Postmates and WeWork are worth it if they will lead to a big payout down the road. In the case of Uber and Lyft, they’re betting that their domination of the ride-share industry will lead to lower car ownership, more autonomous vehicles and the decline of public transportation. More interestingly, because of the lower number of IPOs happening recently, investors are more limited in their options and make different choices than if there was a bigger variety.
IPOs on NYSE, AMEX and Nasdaq with prices set $5+
Amazon is the most prolific example of this—making little profit off a product to grow its business, or subsidizing one business with another one. Its online marketplace and ecommerce business doesn’t make a lot of profit, but the company is able to continue operating them because it makes so much profit from Amazon Web Services division.
The biggest issue is companies pretending they’re tech startups—Beyond Meat and WeWork, for instance, aren’t necessarily tech companies—with investors funding them as if they were. Tech companies typically scale well and other companies might not, which is why investors are willing to believe they are something they might not actually be.