![]() ![]() Valuations are almost entirely speculative and supported by little more than the trajectory of sales and user growth, funded by an enormous cash burn. Diminishing user growth, while spending huge amounts to try and mitigate their losses is a cause for concern. They are not yet profitable and there is little concrete evidence that they have any long-term value. Ultimately it is possible that both Uber, Lyft and other tech companies are worth very little. Snap is down 32% on its IPO while Lyft is down 25%. If they are initially priced too high – like Snap Inc in 2017 and, more recently, Lyft – then new investors are looking at losses. The key issue for investors is whether IPOs allow new investors to make a return through the share price going up. Uber lost US$3 billion in operating profit in 2018 according to its IPO filing, while Lyft lost US$900m and both admit to being some distance from making a profit. As a consequence, they are much further from eventual profitability and cash generation than earlier IPOs. Indeed the current batch of technology startup IPOs are taking place at a much earlier stage of company development than previous IPOs. The vast majority of venture capital-funded tech start ups collapsed as investors lost confidence in their ability to ever make profits. Plus, there are signs that interest rates are on the rise, which will reduce the amount of money investors are willing to spend on IPO investments.įollowing the dot com crash of 2000, the rate of cash burn should be taken as a warning sign to investors. The current rush of tech IPOs at early stages of their development is likely related to fears of investor fatigue setting in, particularly if companies keep falling below their initial price. So it begs the question: can the ride hailing tech company pay off, if profits are still yet to be made? Pay attention to cash burn Meanwhile, competition remains strong, with traditional taxi firms increasingly developing their own apps, with no proprietary technology involved. In turn, cash burn increased as it attempted to maintain the critical user growth trajectory ahead of its IPO. ![]() Uber drivers on strike in the run-up to the IPO was a timely reminder of Uber’s precarious relationship with one half of its network, as well as providing poor PR ahead of its IPO. Both customers and drivers may then choose to go elsewhere. At some stage investors will tire of funding this so prices will need to go up and driver incentives will need to be withdrawn. Uber has burnt billions of cash every year by subsidising driver pay and offering customers cheap fares. Businesses with low switching costs can gain users rapidly through low pricing, but lose them to someone else equally rapidly with the offer of a better proposition. The focus on user growth, however, often fails to account for a business model’s switching costs. User growth forecasts are made, which do have some relationship to the valuation at IPO and beyond. The real vision for most technology platforms is to emulate Facebook, Amazon or Google and create network effects, which is the phenomenon where the more customers you get, the more useful the product or service becomes, attracting more suppliers which in turn attracts more customers.Īs for user growth, this may be measured in different ways – such as people signing up to the product or service and active, return customers. The end of car ownership could be some way off and predicting the future over such a long time period is fraught with risk. The main influences are clear: a resonant company vision and rapid user growth. It is almost impossible to establish a relationship between the underlying data and the valuation. In reality, there is surprisingly little evidence supporting IPO valuations. Is there any science or rationale upon which to base the values, or are they purely hype on the part of those standing to benefit most? This would include early investors, the board and investment bank advisers promoting the offers. So it’s worth considering how astronomic valuations for these non-profitable companies are calculated. Lyft’s shares have also been on a downward trajectory since March. More big names – including Slack, Airbnb, WeWork and Palantir – are set to follow.īut Uber’s share price began to slide as soon as it went public. Fellow ride-sharing app Lyft floated in March with a U$24 billion valuation and Pinterest had a US$10 billion IPO in April. Uber went public on May 10 with a US$82.4 billion valuation. ![]()
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