Comment by Jim Campbell
March 29th, 2019
This is one of the ways the big boys and girls make money but there is still plenty of room for the rest of us in the same pool.
How Tech Unicorns Are Raking In Cash but Losing Big Money
The IPO class of 2019 is notable for big valuations, diverse business models and little to no profits
Wall Street Journal
By Stephanie Stamm and Eliot Brown
They range from Peloton Interactive Inc., the exercise-bike company that is targeting a roughly $4 billion valuation, to Uber Technologies Inc., whose initial public offering could value the ride-hailing giant at more than $120 billion, far above the $72 billion valuation in its last funding round, according to Dow Jones Venture Source data.
Hot looking babe not included!
Uber rival Lyft Inc. was first out of the gate, with shares closing up 8.7% on its stock-trading debut Friday.
These enormous valuations reflect investor enthusiasm for established, high-growth tech businesses.
They also reflect the unusually long periods that many of these companies have stayed private, thanks to record sums of venture funding from big investors.
Valuations of private tech companies as of their last funding round
In IPO registration
Not yet registered
But Here’s the Thing…
Despite their years in existence, most of these companies aren’t making money and are far from becoming profitable, according to a Wall Street Journal analysis.
Of the eight private companies the Journal analyzed, only one—Cloudflare Inc.—is profitable on an annual basis, according to Dow Jones Venture Source data. Cloudflare declined to comment.
Lyft’s $911 million annual loss is more than that of any U.S. startup that has ever gone public, and decade-old Uber has been losing more than $800 million a quarter.
Of the 63 tech companies valued at over $1 billion when they went public in the past two decades, nearly half were profitable in the four quarters leading up to their IPO, according to Jay Ritter, a professor of finance at the University of Florida.
These companies don’t all make money in the same way, and the variety of business models is one of the more interesting aspects of 2019’s expected IPO boom.
While their inner workings are still largely unknown because they are private, more details about their revenue streams, including which parts of their businesses make or burn cash, will become clearer as they go public.
Lyft is one of several startups that base their business models around facilitating transactions.
Uber and Postmates are other companies that use such a marketplace system.
Lyft pays a driver incentives and by mile and minute.
A user interacts with the company’s website for free.
The virtual-pinboard company makes all its money from what it calls advertising.
It generates no revenue from users.
Customers can use a small part of what each business has to offer for free, but those who want more…
Corporations pay for data analysis software, which is regularly updated by the company.
Users can buy an exercise bike and they can buy subscriptions to workout programs.
More services are provided for higher prices based on the tier.
Please see the entire article below.
One More Way in Which 2019 Could be Different
At the height of the dot-com boom in 1999, hundreds of companies collectively raised a record $108 billion by going public, according to Dealogic.
Wall Street bankers expect 2019 to top that dollar amount—with far fewer companies.
What’s more, the companies that are planning to list this year will likely have a much higher offer price relative to sales than the average IPO of recent years.
A higher price-to-sales ratio is a sign of investor enthusiasm, and can be used to gauge the value of companies that have yet to turn a profit.
Below is a chart that shows the price-to-sales ratio on the first day of trading of companies that have gone public before 2019, and of Lyft and Uber.
In the past decade, tech companies have entered the public sector with an average price-to-sales ratio of 3.7.
Lyft and Uber may have ratios nearly three times as high, based on information disclosed in their initial IPO registration documents—though not as high as some well-known tech giants.
Price-to-sales ratios of tech companies that went public with at least $500 million in inflation-adjusted sales the year before IPO
Sources: Dow Jones Venture Source (valuations and profitability); PitchBook (Cloudflare valuation); Jay Ritter, University of Florida (price-to-sales ratio comparisons)