The Second Order Consequences Of The Uber, Lyft And Beyond Meat IPO’s

These public listings include some of the biggest names from Silicon Valley such as Pinterest, Uber, Lyft and several other so-called “unicorns.”.

With the IPO’s of Uber & Beyond Meat, an entirely new wave of young startups may soon be attacking a wide range of “non-tech” industries. Credit: Getty

Getty

Over the last few months, the IPO window has opened in a significant way on Wall Street as a host of venture capital Startups have gone public on the New York Stock Exchange and NASDAQ.These public listings include some of the biggest names from Silicon Valley such as Pinterest, Uber, Lyft and several other so-called “unicorns.”

While this in itself is newsworthy, one aspect not being talked about enough is that several of the biggest IPO’s are not technology companies in the pure sense of being SaaS, Social Media or Enterprise Software. Instead, they are companies that are leveraging technology to innovate and disrupt traditional analog industries such as:

  • Transportation:Companies like Uber and Lyft pioneered ride-sharing as they compete with the taxi and automobile industries to redefine “mobility.”
  • Food:Beyond Meat and its “alternative protein” is trying to change how the world eats its hamburgers.
  • Retail:Luckin Coffee, which calls itself “China’s second largest and fastest-growing coffee network” is trying to beat Starbucks and Dunkin Donuts with a delivery-centric model that is UberEats meets coffee.
  • Home Entertainment: Sonos is redefining the home sound system with their smart wireless speakers as they compete against Sony, Bose, Samsung and a host of other home electronics companies.

Each of these IPO’s have been extremely successful in their offerings, generating significant demand on Wall Street. In just one day, Beyond Meat saw its value soar from $1.6 billion to $4.2 billion.Lyft, despite trading down since going public, is still valued near $20 billion. Meanwhile, Luckin is looking to raise over $500 million at north of a $4 billion valuation when it goes public in the coming days/weeks.

The part of the story that intrigues me as a brand marketer in these IPO’s will be the Second Order Consequences that come from them.If you aren’t familiar with the term, Benedict Evans of the venture firm Andreessen Horowitz touched upon the concept in a post about electric and autonomy in automobiles:

There are profound consequences beyond the industry itself. It’s useful, and perhaps more challenging, to think about second and third order consequences. What those consequences would be is much harder to predict: as the saying goes, it was easy to predict mass car ownership but hard to predict Wal-mart, and the broader consequences… will come in some very widely-spread industries, in complex interlocked ways. Still, we can at least point to where some of the changes might come. I can’t tell you what will happen – but I can suggest that something will happen, and probably something big.”

In this case, the Second Order Consequences will be the behavior around categories and industries that are just now feeling the impact of digital disruption.This behavior will come from two direct effects where the cause might just be the IPO of these digitally-enabled companies.

“The 2nd Order Consequences will be around industries that are just now feeling the impact of digital disruption.”

First, IPO’s have a cascading impact on how venture capital investors view certain categories – both positive and negative. The strong performance of an offering can have an impact on the entire category. This can lead to more investors being willing to consider a category as attractive from an investment standpoint, making it easier for early-stage companies to raise financing – or more difficult if a sector struggles like AdTech a few years ago. In this case, these IPO’s have the potential to show the financial visibility of certain non-technology categories that traditional venture investors may have shied away from in the past for any number of reasons.

Second, in addition to investors being more attracted to these industries, the IPO’s unleash founders that now have deep domain and subject matter expertise. These founders have seen first-hand what it takes to build high-growth companies. They also have the financial means thanks to profitable stock options to launch their own ideas or to back other founders. This exact scenario is what famously gave rise to the “PayPal Mafia,” which counts entrepreneurs and investors such as Elon Musk, Peter Thiel, and Reid Hoffman amongst its group. In today’s market, we now have a group of potential markets that have deep domain expertise in using digital to disrupt Blue Chips.

While the Second Order Consequences of these IPO’s are far from certain, the potential is one that Fortune 500 leaders need to consider. With investors and founders more comfortable in leveraging digital for traditionally analog industries, an entirely new wave of young startups may soon be attacking a wide range of industries in the very near future.

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Cashing out in Uber’s IPO: China, Russia and the Middle East

Previously, Uber’s former chief executive Travis Kalanick spoke publicly about the need to raise large sums quickly to buy market share and find local …

SAN FRANCISCO (Reuters) – In 2015, Uber Technologies Inc went on a fundraising spree in China, tapping venture capitalists and state-backed corporations for cash and connections to try and navigate the Chinese regulatory environment.

Logo of Uber is seen on a smartphone screen as a picture of stock exchange graph is displayed on a computer screen in this illustration picture, May 7, 2019. REUTERS/Kacper Pempel/Illustration

Uber ultimately pulled out of China, but the investors it gained in the country became part of a gallery of far-flung Uber financiers that include U.S. geopolitical rivals under intense regulatory scrutiny by the U.S. government.

Uber’s investors come in all stripes: state-owned banks and corporations from China and Russia; sovereign wealth funds from Qatar, Singapore and Saudi Arabia; a Russian businessman arrested last year on embezzlement charges; venture capital funds from across Europe and the United Arab Emirates; and Indian conglomerates and a Malaysian public pension fund.

Many of these investors will likely have made a bundle this week in Uber’s long-awaited initial public offering. The company on Thursday priced its shares at $45 a piece, raising $8.1 billion in the largest U.S. IPO since 2014, and will begin trading on the New York Stock Exchange Friday.

The ride-hailing company’s aggressive pursuit of capital and international presence from early on gave executives greater access to foreign investors compared to other U.S. startups. Uber was also seeking cash at a time of frenzied growth, with global investment into U.S. startups jumping 50 percent from 2013 to 2014, according to PitchBook Inc data.

That helped it raise nearly $14 billion in venture capital, making it the fourth best-funded startup globally. Uber has also raised more than $6 billion in debt, according to PitchBook.

Uber, more than almost any other Silicon Valley company, symbolizes the glut of foreign money that has helped fuel a tech investing frenzy.

But replicating its feat today would be an improbable task in the current regulatory climate, analysts and legal experts say.

In August, U.S. President Donald Trump signed a law to expand the powers of a government group known as the Committee on Foreign Investment in the United States (CFIUS), which is tasked with reviewing foreign investments for potential national security and competitive risks.

It gives CFIUS a mandate to probe transactions previously excluded from its purview, including attempts by foreigners to purchase minority stakes in U.S. startups. It must approve deals between U.S. companies employing sensitive technology and foreign investors with influence over the startup, such as a board seat.

CFIUS has so far approved only about 10 percent of the deals submitted under the new law, according to attorneys’ estimates.

“What happened (with Uber) in 2015, you certainly could not do that again,” said an attorney who advises clients on CFIUS cases and who spoke on condition of anonymity because of the sensitivity of the matter.

A spokesman for Uber declined to comment. Previously, Uber’s former chief executive Travis Kalanick spoke publicly about the need to raise large sums quickly to buy market share and find local investors who would help smooth the regulatory path in different countries.

CRACKING DOWN

The lion’s share of Uber’s fundraising was completed prior to the new CFIUS law, and there is no indication any of these investments were in any way unlawful. Chinese state-backed funds have invested in dozens of Silicon Valley companies, from drones to self-driving cars and cyber security.

But the challenge of a tech company replicating Uber’s fundraising today highlights just how much U.S. regulators have cracked down on foreign investment.

Attorneys who work on CFIUS cases say a business like Uber’s would be highly scrutinized if fundraising today. The company has a trove of personal data on customers, including who they are and where they go, which CFIUS has indicated is a national security matter.

“The Uber product is its users,” said the CFIUS attorney. “So when you look at it from that way you can see why CFIUS would be interested in it.”

That’s not to say it is impossible to raise money from overseas, and investors from ally countries have an easier time getting clearance for their tech investments.

But state-owned or state-backed investors from China and Russia in particular would be a no-go for CFIUS, say attorneys.

CFIUS earlier this year unwound the acquisition by a Chinese gaming company of dating app Grindr, calling its ownership a national security risk. Grindr collects personal information on its users and data on their whereabouts.

Uber’s autonomous driving business would also likely cause problems with CFIUS today. Autonomous driving is considered important technology for the military, making it a national security concern for CFIUS.

Uber last month raised $1 billion for its autonomous vehicle unit from a consortium of investors including Japan-based SoftBank Group Corp and Toyota Motor Corp. It remains to be seen if that investment receives CFIUS’ blessing.

Reporting by Heather Somerville, Editing by Rosalba O’Brien

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How does Uber IPO differ from dot-com boom?

… capital-backed tech companies going public in the United States this year is $9.6 billion, according to CB Insights, a company that tracks startups.
Uber signage on a car in New York, April 14, 2019. Uber priced its public offering on May 9 at $45 a share, near the bottom of its expected price range, valuing the ride-hailing company at about $82.4 billion. Jeenah Moon, The New York Times

When Uber begins trading on Friday, it will cap one of the largest ever tech initial public offerings and join a crowd of big-name startups making their stock market debuts this year.

Not since the dot-com boom have so many richly valued tech companies gone public in such short succession: Shares of Lyft and Pinterest are now trading, and Slack, WeWork and Palantir are expected to follow soon.

But this crop of tech companies is markedly different from those that came up during the late 1990s.

Many rode the rise of mobile connectivity and cloud computing in the last decade to multibillion-dollar valuations. They are more mature, having spent years as private companies building their businesses. But a number remain deeply unprofitable, and the time they spent in the private markets, increasing in size and value, has ultimately raised questions about where they go from here.

By staying private for longer, tech startups have been able to avoid public scrutiny

When Netscape, Yahoo and Theglobe.com, a now-defunct online network of “virtual communities,” went public in the late 1990s, none had been around for more than three years. When Lyft began trading on the Nasdaq in late March, it had been in business for about seven, and it was young compared with others. Uber, PagerDuty and Pinterest have all been operating for at least a decade.

There are a number of explanations why companies are staying private for longer. Some point to increased regulation of public companies. Others note how record-low interest rates after the financial crisis pushed investors into private markets, increasing the amount of money available for funding rounds.

But by relying on venture capitalists and other investors to finance their operations, startups have had more runway to figure out sustainable business models while avoiding the public eye.

Today’s tech startups going public have built big businesses as private companies

Not surprisingly, the startups in this IPO wave are more valuable.

The average stock market valuation of the venture capital-backed tech companies going public in the United States this year is $9.6 billion, according to CB Insights, a company that tracks startups. Their combined value could exceed $150 billion by year’s end.

Lyft, which raised about $5 billion, went public with a valuation above $20 billion. Investors handed Uber even more — about $15 billion in all — and the company was valued at more than $82 billion when it priced its public offering on Thursday.

Amazon and Yahoo, by contrast, were worth less than $500 million at the time of their IPOs.

Much of the startups’ growth may be behind them

Investors have long made bets on companies that promise to revolutionize how people shop, travel and consume media. Two decades ago, many ignored the relative youth and financial outlook of the startups they were backing. For some, the bets paid off: Amazon, eBay and Google trace their roots to the dot-com boom. But the period also produced many high-profile flops like Webvan and Pets.com.

Unlike those busts, highly valued tech companies today are more established, and many of them are drawing billions in revenue. Still, not all seem like sure bets.

Sales growth for several of the startups appears to be slowing. Last year, for example, Uber’s revenue rose 42 percent from the year before; in 2017, revenue more than doubled from 2016.

By comparison, Netscape, Amazon, eBay and Yahoo combined generated less than $100 million in revenue when they went public. But they were on the upswing, and in the three years after their IPOs, their revenues surged by more than 10 times.

Slowing revenue growth doesn’t necessarily mean investors who buy in at the IPO price will miss out on big gains. Some investors worried about Facebook’s slowing revenue growth when it went public in May 2012. But three years after the debut, its revenue had tripled and its share price had more than doubled.

But the slowing growth of this new generation has raised questions about whether some of them will become profitable soon.

Being unprofitable is hardly a new phenomenon. Startups have often lost money as they go public, but the losses by some in the current group are particularly steep. Lyft lost nearly $1 billion last year, among the largest by a company in the year before it went public. And Lyft’s loss is not the largest of those planning IPOs. WeWork lost $1.9 billion last year, and Uber lost $1.1 billion in the first quarter alone.

Today, regardless of their profitability and with less need to raise cash, many of these companies are going public largely to provide their founders, early investors and employees an opportunity to cash in at what are already very rich valuations.

Those shareholders who got in early stand to reap a windfall. Whether further big gains will continue to materialize for those buying shares in the public markets remains a question.


2019 New York Times News Service

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Is Israel At 71 A Scale-Up Nation? VCs Talk About The Good, The Bad, And The Promising

Noam Kaiser, an investment director at Intel Capital in Israel, tells NoCamels it’s clear that “Israel in 2010 and Israel in 2019 are not the same country” …

Over the past several years, Israeli researchers have noted a certain maturity in the local high-tech industry corresponding with larger-scale investments in companies pursuing growth. Tech executives and observers have taken to referring to this trend as part of Israel’s evolution from the Startup Nation – a term coined earlier this decade after the release of the best-seller book bearing the name – to the “Scale-Up Nation,” owing to the increase in the number of investments of $20 million or more per funding round and fewer quick exits.

In this first quarter of 2019, for example, Israeli high-tech startups and companies raised $1.55 billion in capital in 128 deals, with those higher than $20 million making up 64 percent of the total amount invested. Two of the 128 deals were for over $100 million apiece.

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Venture capital groups also play an increasingly significant role. Deals backed by VCs amounted to 71 in Q1 2019 and accounted for $1.3 billion of the total raised.

An illustrative photo of a handshake. Photo via Pixabay

An illustrative photo of a handshake. Photo via Pixabay

The trend, wrote Shira Azran, a partner at Meitar Liquornik Geva Leshem Tal & Co which co-released a separate report on Israel’s high-tech industry with the IVC Research Center, “highlights the fact that Israel is building a strong and significant infrastructure of companies that in the coming years will examine their ability to reach an exit that reflects a significant return to investors.”

Of the 20 companies listed on TechAviv’s list of Israeli unicorn companies (valued at over $1 billion) to date, 13 were founded over the past decade.

Noam Kaiser, an investment director at Intel Capital in Israel, tells NoCamels it’s clear that “Israel in 2010 and Israel in 2019 are not the same country” given the number of companies raising over $100 million, selling for over $100 million, issuing successful IPOs, and employing hundreds of people.

But where is this all headed?

To mark Israel’s 71st Independence Day, NoCamels spoke to some of the biggest venture capitalists in Israel on what we can expect for the future of Israeli entrepreneurship and the country’s booming high-tech sector.

The strengths: The Israeli character and exporting tech

Since its establishment, Israel has thrived on the self-sufficient, entrepreneurial spirit of its people. In fact, says Kaiser, the country’s survival depended on it: “When we made the navigation towards this geographical area, it wasn’t because of the natural resources. We are based in the one area [in the Middle East] that has no oil. It wouldn’t have worked without the spirit of innovation, and innovation happened because it had to.”

Jon Medved, the founder and CEO of OurCrowd, attributes much of the country’s success to Israelis’ perception of geographic, political, and economic obstacles as challenges to overcome, rather than threats.

“It’s what we do here. We turn our curses into blessings. We don’t have water, so we developed water technology. We don’t have a market, so we go global. Our kids have to go to the army, so we teach them skills that are important for the business world,” Medved tells NoCamels.

An illustrative comcept of a connected world. Photo via Pixabay

An illustrative concept of a connected world. Photo via Pixabay

Kaiser of Intel Capital, the most active corporate VC in Israel, explains that Israelis’ global mindset – given the small local market – is a significant advantage, driving Israeli entrepreneurs to look at business through a wide lens.

“The fact that we don’t have a huge local economy is a huge plus because it makes our entrepreneurs think globally from day one. Israeli entrepreneurs seek out American, British, European, Chinese, and Indian markets and that’s the type of thinking that a founder of any startup needs to have,” he explains. Kaisler says this broad mindset is responsible for the creation of a unique economy built primarily on high-tech exports, and for which “there is no parallel [economy] anywhere on the planet.”

Decades into the emergence of Israeli startups, Yoav Tzruya, a partner at Jerusalem Venture Partners, believes companies are becoming more methodical, and subsequently, reaching further: “The Israeli startup market is maturing in the sense that both entrepreneurs and investors have longer paths for success and more patience, allowing their companies to be exploited to their full potential.”

According to Omry Ben-David, partner at Viola Ventures, “Israel will continue to lead the way in global innovation.” The anomaly of Israel’s tech industry, he says, is not only its creation but its sustainability going forward. “The entrepreneurial spirit and culture are stronger than ever. Add to that 2nd and 3rd timer entrepreneurs, experience in working abroad and working for global corporations here and abroad, and you get a hotbed for continued success.”

Ayelet Frisch, a co-founder of New Era Capital Partners which invests in early revenue stage technology startups, says the country’s entrepreneurial mindset sets it apart from others.

“Israel is a fertile ground for cutting-edge technology, out-of-the-box thinking, and technologies that are ahead of our time. There’s a tendency to always think of how to go forward, improve and grow,” says Frisch, the former media and communications strategist for the late President Shimon Peres.

The challenges: Scaling, diversity and team culture

“I think the main challenges are to build really huge companies of scale. Israelis are really good at getting companies started, figuring out cool technologies and markets, and being very innovative,” says Medved. “Unfortunately, all too often, companies get bought early, before they have a chance to really build.”

Though Israeli companies have had some historic exits in recent years – Mobileye ($15.3 billion), Mellanox ($6.9 billion), and Orbotech ($3.4 billion) to name a few – Medved says the fact that smaller companies frequently sell early on due to the difficulty of scaling the business and fail to achieve their full potential in the process.

Professor Amnon Shashua. Courtesy of Mobileye

Mobileye co-founder Professor Amnon Shashua. Courtesy of Mobileye

With increased experience in the startup community and more total capital invested in Israeli high-tech, the standard for innovation and effective business planning has risen. “We are, one could argue, in the middle of the fourth decade of startups in Israel. So, right now, you need to do more to make a dent,” says Kaiser.

Tzruya notes that a change in individual and B2B (business-to-business) consumer attitudes has driven a dramatic change in the market at large. “Four or five years ago, it was enough to come up with [some sort of] technology or base-solution that addresses a certain portion of the cybersecurity problem horizontally across industry, in a one-fits-all solution approach,” he says, giving an example. Now, “customers are looking to get solutions for their full set of problems rather than a specific piece of technology.”

As a result, startups are under more pressure and the challenge of scaling becomes notably more daunting. One of the key solutions, says Medved, is diversity.

“The issue of scale starts with being able to build that team, and for that team to scale, you need to add other DNA to it,” Medved tells NoCamels. “I think we’re doing a better job of bringing in the not-yet-fully mobilized populations of the Arab Israelis, haredi [ultra-Orthodox] Israelis, and women Israelis into the tech umbrella.”

Participants in the Starting Up Together program at the Peres Center for Peace and Innovation. Photo by Roei Hirsch

Participants in the Starting Up Together program at the Peres Center for Peace and Innovation. Photo by Roei Hirsch

Adam Fisher, a partner at Bessemer Venture Partners, illustrates another issue. For companies operating in markets abroad, “scaling from afar” can be particularly difficult. “Being far from our main market is less of an issue when getting started, but it is much more of an issue when companies need to scale past $10 to $20 million and maintain high growth rates. The issues are not simply about being far from your customer but being far from the people you are recruiting to grow your business and being far from the growth-stage investors that will fund you,” he explains.

Yet, perhaps most critical to a successful scale is a healthy team culture. Investors put their money in people, after all.

“You look for people who have passion, courage, lots of smarts, high EQ, the willingness to sacrifice, great team skills, and obviously people who have strong abilities in technology. But it’s always the team,” says Medved.

“You are seeking individuals that do not lose [it] when things go astray because things will go astray, for companies rarely end up executing exactly as they pitched to their investors,” Kaiser notes.

Whether a startup has 12 employees or grows to 400, he believes the company is still considered a startup. The only difference? For a startup the size of a corporation, there is an increased responsibility of preserving the culture that made the company successful in the first place. “You have to make sure that it trickles down through all of the levels down to the last, newest employee. I think that that separates the best companies, and this is a skill that, I am afraid to say, we in Israel haven’t integrated enough.”

Transformative tech trends

The experts we spoke to see a promising path for Israel in the following sectors

1. Artificial Intelligence

Possibly the most transformative technology in modern tech, AI’s wide applicability has the potential to revolutionize any industry.

“AI will transform – through the utilization and analysis of data – all business. It could be travel, education, security, health care, agriculture, or transportation,” Medved tells NoCamels.

Israel is currently home to over 1,000 companies, academic research centers, and multinational R&D centers specializing in AI, including those that develop core AI technologies, as well as those that utilize AI technologies for their vertical-related products such as in healthcare, cybersecurity, automotive, and manufacturing among others, according to a recent Start-up Nation Central report.

Computing. <a href="https://depositphotos.com/stock-photos/artificial-intelligence.html?qview=189178426" target="_blank" rel=

Deposit Photos

” width=”1024″ height=”625″> Computing. Deposit Photos

“We are seeing a trend in Israel and globally, where AI and machine learning is increasingly vertical, meaning AI and machine learning is getting deeper into each sector,” Ran Simha, general partner at New Era Capital, tells NoCamels, adding that AI has opened up a world of attractive investments for VCs. “When we look at our investing fields, namely medical devices, digital healthcare, smart transportation and smart cities, and similar areas, we are more and more attracted to companies that are embedding AI technology, because we recognize this is the gamechanger in the short- and long-term future,” he says.

Ben-David, of Viola Ventures, also notes AI’s contribution to the budding sector of “enterprise automation.”

“Automation, broadly defined, is changing everything the way communications once did,” says Fisher. “Some call this AI, some call it machine learning and others just optimizing or algorithms. It makes businesses more profitable, disrupts labor-intensive processes and enables new services.”

With the endless opportunities of AI, Tzruya says Israeli VCs seek out hidden gems at the intersection of AI and specific industries. “We are aiming to identify those diamonds-in-the-rough companies that can potentially impact the world significantly.”

2. Automotive

Israel’s automotive tech sector has around 400 startups, many of which are focused on providing solutions for autonomous cars and securing the data of connected vehicles.

Israel’s automotive industry is booming despite the country’s zero total car manufacturing plants. Startups have taken their knowledge of hardware, sensors, and cybersecurity, and implemented it in the automotive arena. Israel’s largest exit to date is that of Mobileye, the developer advanced driver assistance tech systems, acquired by Intel for $15.3 billion in 2017.

Mobileye. Photo: Intel, Courtesy

Mobileye. Photo: Intel, Courtesy

“Some startups from Israel are managing to be on the radar of US conglomerates and show that we can provide solutions that can be really successful,” says Ben-David.

Kaiser, of Intel Capital, says autonomous mobility will go beyond personal use to long-distance shipping and delivery businesses. “We are a few years away from seeing autonomous vehicles become a significant part of what we see on the road right now. This isn’t science fiction, this isn’t the Jetsons.”

3. Cybersecurity

Israel currently boasts over 400 cybersecurity companies, with the sector raising over $1 billion – a new record – in 2018 alone.

“Israel is known in the world for being a hub for cybersecurity innovation,” says Ofer Schreiber, partner at YL Ventures. “One of the main reasons for this is the IDF and its [units] – like 8200 and C4i – which are the best cyber security schools in the world,” he adds in reference to the intelligence corps and the IDF’s elite technological unit.

Israel’s cyber industry attracts 20 percent of global venture-backed cyber investments and is second only to the US.

Tzruya, an expert in cybersecurity, says “these numbers are amazing given Israel’s relatively small portion of global venture-backed companies.”

Cybersecurity solutions have become essential to any firms relying on any sort of technology to conduct business, which Tzruva explains, makes the most effective solutions a strong business asset.

“Cybersecurity is becoming a business differentiator. If you can guarantee to your customer that the production line is better secured and better equipped to handle the cyber-risks, then you are in a better position to win additional businesses,” he says.

Looking at the global market, Schreiber predicts that the US will continue to be the primary market for Israel’s cybersecurity companies: “US customers are more accustomed to working with early-stage products and are usually more likely to be early adopters than European enterprises, for example.”

Tzruya believes cyber insurance will emerge as cybersecurity’s next most relevant trend, stating that “solution-based approaches – rather than just the technological advantages – like cyber insurance will drive the next wave of cyber startups as has happened over the last two decades.”

Tzruya tells NoCamels that “in order for Israel to generate the next wave of categorial leader companies, we need to be much more fine-tuned to the market and align ourselves with specific industries. As a result, we are looking at the intersections between Israel’s competitive technology advantages like cybersecurity and vertical industries such as financial services, insurance and industrial automotive, where Israeli technology can meet the market’s needs.”

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Clients want Uber. What will you tell them?

… expected valuations, the offerings would all rank among the 10 largest venture-backed tech IPOs since 2012, according to data from CB Insights.

CHICAGO — The largest number of unicorn startups in recent memory are coming to market — with some early-stage venture capital investors standing to benefit handsomely.

While the initial public offerings from companies valued at more than $1 billion — like Pinterest and Lyft — have attracted a lot of attention in the media, they are also the subject of thorny questions from clients. Should they be interested in mega startups going public like Uber?

“Welcome to the jungle of 2019 IPOs,” said James M. Gambaccini of the Reston, Virginia-based Acorn Financial. “When you have an event of this magnitude there is enormous hype and excitement, but very limited historical financial data that investors need to see to make well-grounded investment decisions.”

If Uber, AirBnB and Slack go public at their expected valuations, the offerings would all rank among the 10 largest venture-backed tech IPOs since 2012, according to data from CB Insights.

At this early stage, Gambaccini recommends a wait-and-see approach. In fact, the opening day, week, month and following the 6-month mark will be key data points to analyze and re-evaluate, he said.

Uber IAG
If Uber goes public at its expected valuation, the offering would all rank among the 10 largest venture-backed tech IPOs since 2012. Bloomberg News


However, a handful of tech startups that came to market this year have had eye-catching first-day returns, according to research from Morningstar. The photo-sharing app Pinterest was up 28% at the close of its first day of trading and is valued at $12 billion. Even more impressively, video conferencing firm Zoom finished day one up 72% and is now worth $17 billion.

Other advisors are optimistic.

“I tell clients that when a company that I believe is transformative goes public, I want to own their stock,” says Aventura, Florida-based advisor Austin Frye, president of Frye Financial Center. “Even when there is no immediate prospect of profits, transformative companies eventually find a way to make money. Cases in point: Amazon, Twitter.”

Unicorns and especially rideshare apps — like the $24 billion Lyft — have definite pathways forward to profitability, according to Morningstar analysts. “For these companies, it’s winner takes more, or winner takes all,” said Brian Colello of Morningstar Research Services told attendees during a panel at the 2019 Morningstar Investment Conference .

Such companies benefit from the network effect other tech giants like Amazon and Facebook experience if they can cross-sell additional products to customers, Colello said. For example, Uber Eats — which uses the platform to deliver food to customers — has seen significant growth in recent years.

Like other advisors, Frye is hesitant to buy stock of major IPOs on the first day of trading. He suggests advisors look for cheaper opportunities.

“If the shares of any particular IPO company seem to be running away from me during the first few days of trading, I am patient and wait for the shares to drop down again before buying,” Frye says. “All companies have bad days and bad quarters and eventually there is a buying opportunity for those who wait patiently.”

Uber is expected to list on the stock exchange later this month with an estimated valuation of $90 billion, according to Morningstar.

There are palpable risks involved with unicorn investing. After jumping 8% on its first day of trading, Lyft is 21% below its $72 offer price, according to Morningstar. From 1980 to 2016, unicorn companies with revenue in excess of $1 billion had 8.4% excess returns over a three-year benchmark, while firms with revenue of less than $1 billion lost 8.9%.

Whether clients decide to invest in flashy IPOs, the so-called “year of the unicorn” will continue to challenge advisors to identify risks and opportunities involved with investing in these massive companies.

“It’s likely to be a wild ride,” Gambaccini says.

Sean Allocca

Sean Allocca is an associate editor of Financial Planning, On Wall Street and Bank Investment Consultant. Follow him on Twitter at @sjallocca.

For reprint and licensing requests for this article, click here.


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