By: Arjun Vir Kapoor
By 2019, both Uber and Airbnb, the two largest U.S pre-IPO companies, will be more than a decade old and still private
A unicorn, in muggle terms, is a privately held startup company that is valued at over $1 billion. Private, in this context, is essentially when a company is ‘pre-IPO’ or ‘pre-M&A.’ Since the turn of the century, the global market has seen the emergence of an immense number of such institutions, making what used to be a statistical rarity, into economic normalcy. There is however, significant debate as to when such companies should put their shares up for sale to institutional investors.
The causes for this expeditious change has been the unforeseen turbulent success of gig economies. Three of the five most valuable venture-capital backed companies in the United States today, fall under this domain: Uber, Airbnb, and Wework. Having freelancers rather than employees, to whom they provide no minimum wage or job benefits, and the lack of a need to invest in physical capital, has magnified the large-scale success of these companies. These aspects have aided the companies in receiving massive late stage funding rounds, taking both companies significantly past the median time of 8.2 years to IPO for North American and European Companies, according to a study by PitchBook Data. This median figure itself has gone through an upsurge from a comparatively small 5 year time period back in 2006 due to a similar pre-IPO landscape in recent years.
But it is significant to note that by 2019, both Uber and Airbnb, the two largest U.S pre-IPO companies, will be more than a decade old, and their need to go public will be crucial in their success of expanding their capital base, diversifying ownership, and most importantly, attempting to expand their global presence.
In August of this year, Uber CEO Dara Khosrowshahi, named Nelson Chai as the company’s inaugural Chief Financial Officer in preparation for its forthcoming IPO in the latter half of 2019. The administration over the IPO however, seems far from stable. In an interview with Axios, Chai claimed that Uber may not be ready to go public as of 2019, and there may be additional delays. Khosrowshahi however, downplayed the remarks, stating that the IPO is imminent, possibly to wave off the apparent competition from Lyft, a similar transportation gig firm, who seems to be making an attempt to beat Uber to the public markets.
On October 17th, the WSJ reported that proposals received from Wall Street banks value the ride-hailing company at $120 billion, in an IPO that is likely to feature in February of next year. Despite what Khosrowshahi claims, most people believe that the IPO is still to be postponed once again, with significant ambivalence and apprehension in association with the IPO. Reports also valued Lyft at $15.1 billion , relatively less in comparison to Uber, but still a significant player in the Unicorns space.
Airbnb chief Brian Chesky set a goal of being “ready to go public” on June 30th, 2019, exactly a year from the time of the declaration, with the aim to IPO between then and late 2020, when employee equity grants will expire. Besides the statement made by Chesky, Airbnb has yet to provide further information on the IPO. It has yet to hire a Chief Financial Officer or a Chief Marketing Officer, and has made no approach to any Investment Bank. “We have investors who are really patient, and I want to make sure that it’s a major benefit to the company when we do it,” claimed Chesky.
The nature of the gig economy is such that it allows firms to make substantial profits without having to go public. Every honest and rational man to exist since Adam Smith would be satisfied with such an economic model, and would try to administer an uninterrupted cycle of production and consumption. In theory, it all seems sound. Companies are successful, consumers and satisfied, and employees are sovereign. In practice however, it’s not that simple.
Uber lost $2.8 billion in 2016, and a whopping $4.5 billion in 2017. Such gargantuan losses were due to one primary reason – international establishment. China, in addition to majority of Europe, Africa, and Northern Asia, are all regions where Uber has either failed, or been banned by local governments. In setting up in a new economy, any gig firm, faces the age-old chicken and egg dilemma. In the context of Uber, riders need drivers, and drivers need riders. For Airbnb, renters need tenants, and tenants need renters. Without a recognized market share of their financial counterparts, either party is hesitant to enter the market, creating a logistical fallacy. Uber, and Airbnb, have spent billions in trying to rectify this problem, but the subjectivity and unpredictability of markets has ensured the persistence of such difficulties.
Going public, often increases the landscape over which a company may exert its influence. Not to say that Uber and Airbnb are yet to be global players, but getting funding and equity ownership from a diverse range of sources certainly helps companies legitimize themselves in new locations and wave off local competition. The step of going public however, whenever Uber and Airbnb decide to, is only a step that needs to and should be taken once they have expanded to their maximum potential in local markets. Once local growth stagnates, and they find it difficult to establish themselves in new locations, then taking on external investors can be beneficial This decision-making process seems the most pertinent to unicorns in the current economic environment.
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