Deliveroo's IPO Debacle Is a Bad Look for London


London just learned the hard way that becoming a hub for tech listings is not easy.

Shares in Deliveroo Holdings Plc, the food delivery platform that was supposed to be the poster child for new U.K. listing rules, suffered a calamitous debut. Even after the initial public offering was priced at the low end of its target range, the stock fell as much as 31% in the opening minutes. Trading was briefly halted due to the volatility. If new rules give founders more control, they have to work harder to convince investors to part with their money.

Attracting one of Europe’s hottest startups was hailed as a win for the U.K., one that would draw more unicorns to the London market. But the mismanaged IPO is likely to have the opposite effect, further setting back London’s ambitions to steal listings from New York and Amsterdam. When investors lose money on IPOs, they tend not to be too eager to buy into the next one.

Deliveroo’s showing undoes, for now, much of the effort to make London more attractive to tech firms. The government is pushing through new proposals that will let founders retain control of companies for five years after an IPO, while making it easier for special-purpose acquisition companies to list in the U.K. Companies with dual-class shares will also become eligible for inclusion in top indexes like the FTSE 100. Deliveroo was taking advantage of some of those rules, with Chief Executive Officer Will Shu owning 58% of the voting shares while owning only 6.3% of the economic interest.

The company’s valuation was simply too aggressive. Deliveroo is years away from profitability in a market where competition with the well-capitalized Uber Technologies Inc. and Just Eat NV is fierce. Top investors openly expressed doubts about Deliveroo’s business model, which relies on gig workers. They were not only concerned about the setup being exploitative, with many couriers reportedly earning an average income below the minimum wage, but also about the company’s ability to be profitable should regulations force it to improve pay and benefits.

Shu and his management team failed to address those legitimate concerns. Would-be investors grumbled in private about a lack of access to management, worries accentuated by the fact that, with control of the voting stock, Shu would have little accountability.

In London, a market that tends to focus more on predictable returns than on growth stocks, Deliveroo needed to do a lot more to convince investors that it warranted a 7.6 billion-pound ($10.5 billion) valuation. Had it targeted the lower price level at which it subsequently settled, it would still have delivered a market capitalization of close to 6 billion pounds — enough to warrant ultimate inclusion in the FTSE 100.

Perhaps the company hoped it would hew closely to the experience of U.S. delivery company DoorDash Inc., which jumped 80% on the day of its IPO. But DoorDash is also now down 40% since its February peak, as the loosening of lockdown restrictions sends diners back to restaurants. Deliveroo has hewn to the wrong part of the trajectory.

The experience will likely make going public via SPACs even more appealing. In that case, once a deal is agreed, the company can crystallize a valuation without the need for a laborious investor roadshow. New York-listed SPACs are hoovering up British startups. Arrival Group, a maker of electric vehicles that doesn’t even have any revenue yet, listed last week and is now valued at $11 billion. Cazoo Ltd., an online used-car marketplace, agreed to sell itself to a SPAC backed by hedgefunder Dan Och in a deal valued at $7 billion.

Faced with a choice between an uncertain London IPO market and a lucrative New York SPAC scene, founders will surely opt for the latter.

This debacle may be more damaging for the London Stock Exchange than it is for Deliveroo, which still managed to raise the 1 billion pounds it sought. Clearly, changing the listing rules is not enough to make the market attractive to tech companies. Investors need some love too.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Alex Webb is a Bloomberg Opinion columnist covering Europe's technology, media and communications industries. He previously covered Apple and other technology companies for Bloomberg News in San Francisco.

©2021 Bloomberg L.P.

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