The Uncomfortable Truth About Going Public With a Money-Losing Business: Term Sheet for Tuesday, April 30
TO HELL WITH PROFITABILITY
WeWork (also known as The We Company) is planning to go public. The co-working giant has filed paperwork confidentially with the SEC to conduct an initial public offering in the near future.
The company was most recently valued at $47 billion following a SoftBank investment, which would likely make it the second largest IPO this year after Uber. In an email to the staff, WeWork CEO Adam Neumann wrote: “As one of the world’s largest physical networks, it is our responsibility to help lead the way and set the global example for people and corporations on how we should take care of each other and of our planet.”
That responsibility is real costly. WeWork is yet another business with “eye-watering losses.” The startup lost $1.93 billion on $1.82 billion in sales last year — losses so bad that ratings agencies have given it a “junk” credit score because its growth has been predicated on heavy borrowing. It is yet another unicorn ready to make its public market debut despite never having turned a profit.
Just yesterday, I wrote about how it seems that investors are willing to overlook profitability so long as there’s a promise for long-term growth. I asked the following question, “Do you buy the long-term growth story that founders are selling — or do you see a day when all of this outrageous spending comes crashing down?”
Here’s what Term Sheet readers had to say:
Dominic: Investors should perhaps wake up to the reality that most of these loss-making companies are more similar to restaurants than they are to Amazon.com. I am especially interested in seeing how Lyft will play out over the next couple of years since they seem to be in a double bind. To continue growing, they will need to continue losing more money on rider and driver subsidies. To turn a unit profit, they will need to increase prices, which will have a negative impact on growth. Unless they can figure out driverless cars, or experiment and build other more profitable businesses on top of their platform, I don't see any path to profitability.
Len: I believe deep pocket investor money that fuels the Valley will dry up rapidly and with severe consequence when the Bull that feeds their investing confidence becomes the Bear that eats the unicorns.
Bonnie: No, I don't buy the fake "long-term growth strategy" that greedy founders & early investors are hawking. To prove my point, I'm tracking the pre-IPO share costs from Equidate (now forgeglobal.com) and comparing them with the strike price and post-IPO share cost. Fear of Missing Out and the media's frenzied articles about newly-minted millionaires in the Bay Area have artificially spurred greed, and my data and research prove it. I consciously choose to use products and services that are developed and owned by entrepreneurs who demonstrate ethical, economic and principled virtues.
Blake: The only way that many of these companies are going to become profitable is to raise prices. A LOT! That's much easier to do, once you have driven out of business the higher-priced competitors that you undercut in price in the first place to get your market share. Caveat emptor!
Andrew: Credit, credit, credit. Too abundant and too cheap for too long. This can get ugly … real quick. Look at what happened in Q4 last year when the Fed hiked rates. They used to say cash flow covers a multitude of sins... now it appears to be cheap, abundant capital. Is that sustainable? Probably not.
Larry: There is one thing about the growth which investors are betting on that hasn't really been thought about. I don't think there is much debate about the fact that equities are overweighted in most portfolios because the prolonged, largely artificial low interest rate environment forced investors to seek returns from somewhere other than fixed income (or similar) instruments. But if the growth that is being projected by all these high flyers actually occurs, an almost certain consequence will be inflation. Rising inflation brings rising interest rates and portfolios will be likely to shift again. That shift will mean that equities will sell off and stock prices will naturally fall. So, by betting on so much growth, these investors are essentially setting their stock portfolios up to fail. Then, we'll start looking at "fundamentals" again. Just like what happened two decades ago....
Adam: As a value investor working for a startup in San Francisco, here's my take. Today, we're witnessing this incongruous environment because Silicon Valley and Wall Street aren't speaking the same language. Most in the Valley see themselves as optimistic futurists, able to create and/or predict the future, creating immense societal impact, which doesn't always translate to earnings. Wall Street, as we know, is a less forgiving environment, valuing financial forecasting and predictability above all else. Societal implications are an afterthought.
Cryptocurrency is one example, with Wall Street taking a cautious stance amid gradual adoption, while Silicon Valley continues to double and triple down on it, even as the price swings.
What separates the contenders from the pretenders in the recent IPO environment, the latter being appealing to both the Valley and the Street, is their unit economics.
There has to be an inflection point when a company swings to profitability, typically by wielding pricing power in a winner-take-all market, or at least continues inching closer to it. If you don't have that, you don't have a business. Plain and simple.
There continue to be far too many comparisons to Amazon, simply because they weren't profitable for so long. Often, these comparisons are misplaced or sleight of hand. They're excuses for not being able to grow profitably or having poor unit economics. So to answer your question, I buy the growth story as long as they understand and control their unit economics. Some have a strong grasp of this. Many do not.
THE LATEST FROM FORTUNE...
• NYSE Owner Buys Crypto Custodian in Latest Push to Offer Bitcoin (by Jeff John Roberts)
• Airbnb's Newest Neighbor in the Home Rental Space: Marriott Hotels (by Danielle Abril)
• How Unions Are Pushing Back Against the Rise of Workplace Technology (by Jonathan Vanian)
•Meet the Woman Who Made History in Male-Dominated E-Sports (by Lisa Marie Segarra)
Airbnb will be ready for an IPO later this year. Menlo Ventures is poised to make billions thanks to its early Uber investment. The Fed is trying to figure out how to fight the next recession. Facebook is opening its data to academics for the first time. Teens don’t vape — they Juul. Sprint, T-Mobile push back deadline to complete merger.
• UiPath, a New York-based AI enterprise software developer, raised $568 million in Series D funding at a post-money valuation of $7 billion. Coatue led the round, and was joined by investors including Dragoneer, Wellington, Sands Capital, T. Rowe Price Associates, Inc. Accel, CapitalG, Sequoia, IVP and Madrona Venture Group.
• Divvy, a Lehi, Utah-based tech-enabled replacement of monthly expense reports, raised $200 million in funding. NEA led the round, and was joined by investors including Pelion Venture Partners and Insight Venture Partners.
• Spot.IM, a New York-based social engagement and community platform for digital publishers, raised $25 million in Series D funding. Insight Venture Partners led the round, and was joined by investors including Millhouse Capital, AltaIR Capital, Cerca, and Jonah Goodhart.
• ManyChat, a messenger marketing platform, raised $18 million in Series A funding. Bessemer Venture Partners led the round, and was joined by investors including Flint Capital.
• Perkbox, a London-based employee experience platform, raised £13.5 million ($17.6 million) in funding. Draper Esprit led the round.
• Congenica, a U.K.-based clinical decision support platform provider, raised £13.25 million ($17.1 million) in funding. Parkwalk Advisors led the round, and was joined by investors including Digital China Health Technologies Corporation Limited.
• HUM Nutrition, a Los Angeles-based nutrition company that develops vitamins, supplements and powders, raised $15 million in Series B funding. Sonoma Brands led the round, and was joined by investors including CircleUp Growth Partners, Natalie Massenet and Nick Brown's Imaginary Ventures, and Strand Equity Partners.
• Pana, a Denver-based startup focusing on corporate travel, raised $10 million in Series A funding. Bessemer Venture Partners led the round, and was joined by investors including Techstars, Matchstick Ventures, and MergeLane Fund.
• Finitive, a New York-based financial technology platform providing institutional investors with direct access to alternative lending investments, raised $6 million in seed funding. Atomic Labs led the round, and was joined by investors including Ninepoint Partners.
• Intrinio, a St. Petersburg, Fla.-based developer of a platform for data feeds and fintech applications, raised $5 million in Series A funding. Nyca Partners led the round, and was joined by investors including Engage, Bascom Ventures and VilCap Investments.
• Cushion, a San Francisco-based developer of an app that helps consumers negotiate their bank and credit card fees, raised $2.8 million in seed funding. Investors include Afore Capital, 9Yards Capital, Flourish, Green Cow Venture Capital, and Vestigo Ventures.
• Duco Advisors, Inc, a San Francisco-based software-as-a-service marketplace that helps enterprises hire consultants for high-value projects, raised $1.7 million in seed funding. Subversive Capital led the round, and was joined by investors including NFX and Bulldog Innovation Group.
• Zūm, a logistics platform that offers child transportation for school districts, raised funding of an undisclosed amount from Citi Ventures. This investment is an addition to its existing $40 million Series C round.
PRIVATE EQUITY DEALS
• Emil Capital Partners, Keller Capital, and Tim Ferriss made an investment in milk + honey, an Austin, Texas-based spa and beauty brand. Financial terms weren't disclosed.
• Francisco Partners made an investment in Perforce Software, a Minneapolis-based provider of enterprise-grade development operations software solutions. Financial terms weren't disclosed.
• Chewy, a Dania Beach, Fla.-based pet product ecommerce firm, filed for an $100 million (likely placeholder) IPO. The firm posted $3.5 billion in sales for the year ending January 2019 as well as loss of $2.7 billion. PetSmart and BC Partners back the firm. Allen & Company, J.P. Morgan, and Morgan Stanley are underwriters. It plans to list as “CHWY.”
• Codiak BioSciences, a Cambridge Mass.-based biotech, filed for an $86 million IPO. Jefferies, Evercore ISI and William Blair are underwriters. ARCH Venture Funds, Flagship Venture Funds, and Fidelity back the firm. It plans to list on the Nasdaq as “CDAK.” Read more.
• Sonim Technologies, a San Mateo, Calif.-based maker of mobile phones and software for industrial and public sector customers, plans to raised $50 million in an IPO of 3.6 million shares priced between $13 to $15. It posted revenue of $135.7 million and loss of $8.8 million in 2018. Nokomis Capital (23.3%) and B. Riley Financial (20%) back the firm. It plans to list on the Nasdaq as “SONM.” Read more.
• Alex Patil joined Monroe Capital as a managing director.
• Hidden Harbor Capital Partners hired Adam Hanselman as a vice president and Daniel Matam as an associate.