This year was meant to be the year of the IPO, with some of the most anticipated tech unicorns poised to make their public debut. As we near the end of 2019, it’s clear that things haven’t gone according to plan. The poor stock trading performance of consumer-facing companies like Uber, Lyft and Peloton, with strong performer Pinterest serving as one of the rare counterexamples, has been significant. Add to that the storm of media criticism around WeWork, which did not even make it to the public markets. There is one consistent theme that public market investors are looking for and that’s a path to profitability. Investor appetite for companies that confidently post revenue growth numbers but avoid outlining a path to profitability has disappeared. In its place is renewed interest in cogent and sustainable business models instead of those whose road to profitability is too far in the distance to see.
A world where these high-profile technology companies didn’t experience post-IPO fall in share prices would have been better for everyone. However, there is a silver lining in the last several months of stock under-performance as it has been a big wake up call. We are very fortunate that this is all happening now, in a bull market, where investors and the market have the breathing room to push companies to articulate a clear path to profitability. It’s much better for this market reaction to happen now, when there is time and room to course correct and the economy can absorb it when there are ample jobs and the economy is strong.
The last time we saw a major market correction with technology companies was in 1999. Today’s unicorns may seem different from what we saw in 1999, but there are some parallels. Take Pets.com, they were acquiring customers but hadn’t properly assessed the unit economics for acquiring those customers. They ended up burning through vast amounts of cash with no path to profitability in sight. This issue of unit economics can be seen in the ride hail businesses of Uber and Lyft along with some of the food delivery companies such as Grubhub. It is simply costing these companies too much to acquire and retain customers in an age when the consumer can easily move from one app to another.
The positive takeaway for boards, CEOs and investors should be that the immediate future is bright, because we have the time to course-correct. The public markets are holding strong and look to stay that way for now. Thoughtful management teams are aware of the shifting sentiment from growth to profit and will take steps to temper their appetite for the former, especially if they are only a few quarters away from an IPO.
Looking ahead to 2020, investors will reward companies whose business models are proven and show continued profitability alongside ongoing predictable growth. One hotly anticipated example for the coming year would be Airbnb. Airbnb is a true market-place technology business with real benefits of scale and compelling unit economics. There’s a lot we still don’t know in terms of numbers, but according to the Wall Street Journal, early indications show that they were EBITDA-positive in 2017 and 2018.
It’s plain to see that a company going public now without a compelling path to profitability story will be punished. Pre-IPO companies which continue to invest in growth now need to focus on driving profits and managing costs and they will be well-rewarded by the public markets. The IPO woes of 2019 may well turn out to be 2020’s boon.
For both private company directors as well as CEO’s as you begin to think about liquidity choices for your company you normally think of an IPO. There is of course another alternative you may want to discuss with your boards which is a Direct Listing.
In the traditional IPO route, new shares are created and sold to the public. In this scenario the company works closely with underwriters/bankers.
Underwriters/bankers assist with regulatory requirements, deciding the initial price of shares, and working to sell the shares to investors in their network. Prior to the IPO the company and underwriters go on a “roadshow” so the top execs can present to institutional investors to create interest in purchasing the stock once it goes public. This process may be lengthy and costly.
However, there is an alternative: the Direct Listing. The Direct Listing is emerging as a popular alternative to the IPO, and while it does not come with the “safety net” of an IPO it does have many benefits. In a Direct Listing no new shares are created. Only existing, outstanding shares are sold. This is particularly beneficial if a company does not want to dilute existing shares by issuing new shares. A direct listing enables willing buyers and sellers to directly transact with minimal lockup and bureaucracy. Existing investors and even employees who hold shares can directly sell their shares to the public. This is a fantastic option for companies who perhaps cannot afford the service of underwriters or do not want to be restricted by a lockup period.
I recently attended a presentation by Colin Stewart of Morgan Stanley on this emerging phenomenon, and here are some takeaways from the presentation:
Historically, smaller companies such as food and biotech have gone public via a direct listing. Typically during a regular IPO 10-15% is sold. Spotify broke the mold being a massive tech based consumer company to go the direct listing route. Spotify sold 17% of their outstanding shares on the first day of their direct offering. Slack, another notable software company that opted for a direct listing, sold 22% of their outstanding shares, and were the 5th lowest in volatility for massive tech IPO’s. Despite the risk associated with Direct Listings, both Spotify and Slack experienced less volatility than smaller float IPO’s such as Zoom.
Some benefits of a Direct Listing include: less share dilution, being able to circumvent mandatory lock up periods and other regulatory requirements. These items may be increasingly attractive enough that companies may begin to favor Direct Listings over customary IPO’s.
This emerging trend is something that companies considering going public may want to review before hiring underwriters and going through the task of going on a roadshow, and meeting all of the regulatory requirements associated with an IPO.
The gig economy has evolved since task-oriented workers first started looking for additional income. Companies like Uber, Lyft, Etsy, 99 Designs, Grubhub, and even Airbnb, have forever changed the landscape for how people can pick up a “gig” to earn a living or generate supplemental income. Today, companies are seeking high-level expertise to fill the gaps within all areas of their organization, creating the next phase of the gig economy – the market for on-demand advisors.
A recent report by McKinsey found that knowledge-intensive industries and creative occupations are the largest and fastest-growing segments of the gig economy. Businesses are hiring experts who can advise at a high-level and in detail on how to navigate top business challenges like artificial intelligence, cyber-security, cash flow management, or new technology trends. According to a Forrester survey, 88% of companies agree that specialized talent is essential to the long-term viability of their organization.
This is where on-demand advisors come into play. High-level executives who are deep industry experts are contracted at an hourly rate for an agreed-upon length of time, whether it’s to meet for an hour about an HR crisis, extend to a longer engagement to help facilitate an IPO, or somewhere in between. This is a particularly valuable concept at the executive level, where on-demand advisory work allows companies to connect with independent subject-matter experts when they need advice the most. This also works for individual C-suite executives, who can reap the benefits of having an outside advisor to ask questions, brainstorm ideas, make key introductions, and offer insight on relevant areas of expertise.
Advisors can also fill in a gap between corporate boards and executive management teams’ responsibilities especially in private companies. Because corporate boards are focused on corporate governance that includes a wide range of topics like expansion, raising capital, or exit strategies, the strategic goals of boards are at times not aligned with the capabilities of the management team. On-demand advisors can fill that void by providing the know-how and guidance to reach goals. These advisors can bridge the gap and provide much-needed insight for managing the board’s expectations. These advisors are asked to join the board to become a long-term integral part of the business strategy and planning.
So, where do you find these advisors? For executives that want to make themselves available as an advisor, a good place to look is with professional advisor networks like AdvisoryCloud, which has a directory of over 8,000 advisors on their platform. AdvisoryCloud helps executives build their personal brand as an advisor by providing members with a public advisor profile. These profiles are individual webpages that act as a hub for attracting and managing their advisory work. Professionals can list their skills and experiences, and get hired and paid through a secure payment system.
I have taken a close look at these key tech trends and have noted how they may impact the strategies your board should be looking at.
Board Action: If you reach your customers via smartphones factor in maximum penetration in developed markets, smartphone growth will be in emerging markets.
Board Action: Consider shifting strategies toward content being mobile enabled as the primary channel.
Board Action: How do mobile payments fit into your company’s strategy? Are you doing business with China?
Board Action: Is there a way to add voice enablement to your product or service?
Board Action: The focus of your sales strategy should be e-commerce.
Board Action: Review healthcare under two lenses as a benefit that may need changing for your employees, and whether or not it will impact your business strategy for your products or services.
Board Action: Seek futurists to determine the trajectory of tech disruption for your company.
Board Action: Consider new models of employment, such as gigs and remote workers.
Board Action: Determine how AI can help you transform and embrace digital more quickly.