The clock is ticking for the IPO class of 2019
This week, the news has been dominated by the Brexit maelstrom. Everything else has been drowned out by its din. But in the background, if you’re plugged into the tech scene, you’ll have discerned a faint ticking.
That ticking is the sound of a clock counting down towards the time when a slew of technology companies, who recently IPO-ed, see lock-up periods on their stock expire. When zero hour hits – and major shareholders of pre-IPO equity are allowed to sell – some predict a bloodbath, as VCs, early investors and staff wind down their stakes in the world’s hottest companies.
How hot these companies really are is about to be put to the test in the fires of the public markets. By the end of October, we’ll have a better understanding of what the technology and venture sectors really look like and whether the exuberance of the last decade is, as many have been predicting, about to run out of steam.
Some of 2019’s largest IPOs, including Uber, Zoom and Pinterest, see their stock’s lockup periods expire in the coming weeks. Many of these loss-making giants are already out of favour with public market investors, and swimming well below their IPO price, with Uber -33%, Lyft -45% and Peleton -20%.
What we know is that a lot of these companies have raised a lot of capital whilst making next to no profit. In private markets, venture funding has kept them scaling. But a public October examination will shine a light on those on the inside, asking if they really do believe in the future of unicorns. The selling activity of key individuals and institutions will be closely monitored, as prospective and existing public investors wait to see whether management and venture funds choose to take profit. They’ll be quick to move assets elsewhere at the first hint of an exodus.
A negative month will further stymie those who have paused on the IPO sidelines. The likes of Airbnb and Palantir, heavily backed by venture firms, were expected to go to market in 2019 but, given the WeWork fallout and negative sentiment rising in the tech sector, a rough October may mean that they wait longer. It feels like few know how the coming weeks will play out.
To guide our thinking, here are 3 companies to keep an eye whose lock-up expiration could have an impact on the prospects of the technology sector:
An Africa-focused e-commerce company who is already out of the blocks and beyond their lock-up expiration. Jumia’s share price dropped 4% after its lockup expired, although it looks like, despite a lot of negative speculation, there was very little post-expiry selling activity amongst its large shareholders, such as Mastercard and Goldman Sachs. So good news to begin with.
The transport-technology giant is already down 33% from its IPO listing and it could fall further when its lock-ups expire on November 6th, especially given the fact that its losses only seem to be mounting and the nature and focus of its business model look more uncertain than ever.
A really interesting one, given that its stock has more than doubled since its July IPO. When its expirations hit on October 29 we may well get an indication for the first time whether its incredible public market growth is sustainable, or it may show that the insiders know something that the public doesn’t yet know.
Of course, as with all public market activity, the proof of the pudding will be in the stock price come the end of the month. But the fact that so many VCs are already so heavily ‘in the money’ that they would be willing to sell at almost any point below the IPO price feels like a bad omen.
Add the fact that October has, historically, been challenging for markets and the coming weeks could be quite seminal. Of course, the tech bull run couldn’t go on forever and, as we’ve spoken about on the blog previously, only those companies with sustainable business models and robust balance sheets will survive to see the next cycle.
And deservedly so. That’s the point of public markets – they allow investors to collectively grade a company’s future prospects. So when the clock strikes midnight in the coming weeks, it looks like we’ll find out which will have passed and failed.