The Year of the IPO (Whether You Like It or Not)
(Bloomberg Opinion) -- This looks poised to be a big year for initial public offerings, with Lyft looking to go public later this month. Private tech companies have spent most of the decade saying that staying private was preferable, so why the change of heart now? It might be because they suddenly feel that they have to.
As much as private tech companies say they’ll go public on their own timetable, cycles are cycles, and there are reasons some periods see more IPOs than others. Lyft is a great example: It’s very similar to Uber, also set to go public soon, and the behavior of one influences the other.
Lyft may object to this characterization, but it’s like a moon orbiting around the planet that is Uber. While the companies aren’t identical — Uber has a robust food delivery business in Uber Eats — the core activity of both companies is ride-hailing, with Uber being bigger than Lyft. Both companies filed their paperwork with the Securities and Exchange Commission to go public on the same day, but it now appears that the smaller Lyft will beat Uber to the market.
Besides bragging rights, there are strategic reasons for Lyft to go public before Uber. By going first, Lyft might attract some buyer interest from people looking to gain exposure to the industry in their stock portfolios. Another is that for the brief window that Lyft is public and Uber is not, Lyft may be able to make acquisitions using its publicly traded stock as a currency that Uber won’t yet have.
A third reason may be the most significant, with implications for the private tech universe as a whole: By going public first, Lyft’s lockup period for insiders will expire before Uber’s. This means that Lyft employees and early investors will be able to unload their shares on the market before Uber’s can.
That “race for liquidity” dynamic is what makes 2019 different from the rest of the decade. When highly valued upstart tech companies were choosing to stay private, that meant there was plenty of public market money whenever the smattering of startups that chose to go public actually had their IPO. For investors looking to buy, supply was limited. And like in any market, when supply is limited that helps to support price and valuations, giving the companies that remained private the confidence that their decision wasn’t hurting them.
But what happens when a glut of companies decides to go public all at once? In addition to Lyft and Uber, Pinterest and Slack have also signaled their intention to go public this year, and in the end this may be the biggest year for IPOs ever. That glut of supply, both in terms of the money raised during IPOs and then the secondary effect of employees selling their shares, could end up weighing on the prices of not just publicly traded tech stocks but also the valuations of companies that choose to remain private.
It also may reverse the perception of whether public or private companies are more attractive. Earlier in the decade there was a narrative that the best growing tech companies like Airbnb and Uber were staying private while it was “lesser” companies like Blue Apron that were choosing to go public. Maybe now the narrative will be that the best tech companies have the ability and are choosing to go public, and it’s only immature, dysfunctional companies that are staying private because they’re not ready for public markets in this competitive moment.
Given that potential dynamic, it may make sense for companies on the fence about going public in 2019 to just go ahead and jump. Better to get the listing done now and give your employees an opportunity to harvest gains rather than risk the possibility that soon there may be more supply than the market can handle. While the top-tier companies with lofty valuations may get the headlines in 2019, it’s the next tier of startups that bears watching.
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
Conor Sen is a Bloomberg Opinion columnist. He is a portfolio manager for New River Investments in Atlanta and has been a contributor to the Atlantic and Business Insider.
©2019 Bloomberg L.P.