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Already, 2019 is on track to become the year that some of the most valuable VC-backed companies smash records set during the height of the dot-com era. Four companies in particular — Lyft, Uber, Pinterest and Airbnb, also known as LUPA — dominate the headlines as the first high-profile deals of the mobile-app generation to go public.
“The question is, are these companies going public because they want to or because they have to?” said Henry Ward, CEO of equity management software company Carta. “I think in many cases, it’s because they have to.”
Ward reasons, “You will see a flip where the best companies, with the strongest founders, can control their fate and not go public. The weaker companies that can’t control their fate will.”
Lyft, now valued at roughly $30 billion, began trading on the Nasdaq Friday morning at $87.24 per share, 21 percent above its original IPO price of $72 per share. Uber filed confidentially with the SEC last December and is expected to list on the New York Stock Exchange this month with a reported valuation of $120 billion. Pinterest filed its S-1 in March with a private valuation of $12 billion and is also expected to make its public debut on the New York Stock Exchange this month. (Airbnb has not officially announced any IPO plans, but it has been reported recently that the accommodation-sharing site will issue shares directly to the public.)
In their latest VC rounds, all four LUPA companies, plus Peter Thiel-backed Palantir Technologies and Slack, have collectively raised a whopping $26 billion. In total, they bring a private valuation of $158 billion to Wall Street.
Amid the reports and reactions, big questions remain: What can we expect after these aging tech giants list as publicly traded companies? And what do these billion-dollar exits mean for the next crop of VC-backed start-ups?
“There’s only a few companies that can swallow the kind of valuations that have to happen when you look at the overall number of venture-backed start-ups today,” said Jeff Grabow, U.S. Venture Capital Leader at Ernst & Young. “In terms of maximizing profit, the IPO is still the rational goal.”
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According to PitchBook data, the number of VC-backed IPOs in the U.S. declined from 2014 to 2017 before spiking back up in 2018, which was also a record year that saw public debuts from companies like Spotify, Dropbox and Docusign.
“Everybody’s for sale,” Grabow added, speaking to the billion-dollar exits expected out of 2019. “But there’s just not that many companies that can make multiples of what somebody’s going to trade on the opening day. So I don’t think it’s reasonable for a lot of those companies to think of it as a logical outcome.”
The appetite for tech and the overhang of rising VC-backed start-ups is something that Grabow has paid close attention to over the past several years. “Right now it’s like we’re in the middle of a gold rush and everybody’s staking their claim,” he said. “The smart entrepreneurs and investors are making sure that the companies they’ve backed have all the resources they need to strike gold, because you never know when the access to those resources are going to go away.” But when they do go away, he believes that things will be stark.
Describing it as “rarified air,” Ward added that the trend in companies going public out of necessity has not been the case. “If that trend continues, the meaning of an IPO will change,” he said.
And while many are trying to figure out which domino will fall first, Grabow said that nobody’s talking about a bubble like that of the early-2000s. As valuations have continued to increase over the past few years, most VCs have remained cautiously optimistic while deploying more capital.
Still, Grabow admitted that these valuations aren’t sustainable.
“Nothing goes up and to the right forever,” he said. “Ten years from now it’s unlikely that we’ll see as much private capital in the market as we do today.” He also predicts that LUPA-size companies will begin to shorten the time frame in which they remain private, despite the access to capital and benefits they receive as so.
“Never in my career have I seen more investable themes for people to put their money behind,” Grabow said, adding that while there’s a lot of opportunity to continue investing and disrupting, “it always takes more time and money than anybody anticipates.”
Uber, Pinterest and Airbnb all have been named to the CNBC Disruptor 50 List for six straight years. Lyft has been named to the list the past three years, ranking as high as the second spot in 2017.
The 2019 CNBC Disruptor 50 list will be revealed this May.
