Venture Bytes #49 - Onwards to 2019 with Strong Tailwind

Onwards to 2019 with Strong Tailwind

2018 was a remarkable year for IPOs. With great market conditions during the first three quarters of the year, nearly 200 public offerings were completed according to CNBC. The last time more than 200 companies went public in a single year was in 2014, and before that, the early 2000s. Of all the companies going public in 2018, the Wall Street Journal reported that 38 were valued at $1 billion or more at the time of their IPO. This made 2018 the year with the highest number of unicorn public offerings since the 2000 dot-com bubble.

The strong IPO conditions favored technology companies, especially in certain areas. For example, software companies flocked to the public market in 2018. This is likely due to strong results of software companies entering the public market, particularly impressive IPO performances from software as a service companies. By capitalizing on ideal market conditions and strong risk-on investor sentiment, software companies enjoyed surging prices on their first day close following their IPOs. For example, DOMO, Eventbrite, and SurveyMonkey’s stocks all soared 30%, 60%, and 42% respectively on their first day of trading. These companies benefited from strong investor demand despite the fact that each company was unprofitable at the time of their IPO.

Internet media and technology companies also saw a high number of exits including standouts like Flipkart, Glassdoor, and Spotify. These companies serve very different purposes. Flipkart is an e-commerce company whereas Spotify specializes in music streaming. Despite existing in various markets, they are all web or app-based businesses. The shift in preference to on-demand and online platforms is driving development in internet media and technology companies, pushing them towards IPOs and expansion.

Based on the incredibly strong year, 2019 is looking to be just as good, especially in the technology sphere. Despite recent volatility in the markets, many companies have already indicated that they plan on going public in 2019. Specifically, Uber and Lyft have both filed for IPOs that could occur as early as the Spring of 2019. Furthermore, reports indicate that Airbnb and Slack Technologies, both of which have been on our liquidity watchlist, may conduct direct listings in the coming year. And Palantir and Postmates have reportedly planned their respective IPOs. While market conditions may not be as ideal in 2019, we could still see some of the largest liquidity events in history.

Niels Bohr once remarked, “It is very hard to predict, especially the future.” While the future of the 2019 IPO market may not be certain, it will definitely be easier to forecast if you have access to Manhattan Venture Research’s proprietary Liquidity Watchlist.

The Liquidity Watchlist is our proprietary list of the top-25 promising private companies in the TMT space that are candidates for a liquidity event – either an IPO or an acquisition - within the next 12 to 18 months. The companies are ranked based on a series of quantitative and qualitative factors from a pool of over 350 companies that we closely monitor.

We are proud to say that our model predicted 13 IPOs in 2018. The predicted companies had been on our Liquidity Watchlist for an average of 13 months prior to their IPO. The 13 companies MVR successfully predicted for a 2018 IPO or acquisition include Adyen, Anaplan, AppNexus, DocuSign, DOMO, Eventbrite, Flipkart, Glassdoor, NIO, Spotify, SurveyMoney, Tenable Network Security, and Zuora.

Overall our predictive model has a strike rate of 51%. In our universe of 350-plus private companies, 76 companies appeared in the top-25 list that we publish every month, and out of that 39 companies either completed their IPO or were acquired. Furthermore, many of the companies planning an IPO in 2019 have already appeared on our list, including Uber, Lyft, Airbnb, Slack Technologies, Palantir, and Postmates. Stay tuned to the monthly publishing of our Liquidity Watchlist to gain useful insight into anticipating the exciting year of IPOs to come.

Let the Race Begin – And the Speculation

Lyft and Uber filed their registration papers with the SEC for their initial public offering. Who goes first can be debated. Regardless, we believe the ride-hailing sector is primed for the public market, and these two companies symbolize the sector. They sit at the core of the on-demand economy and are redefining the monetization of car ownership and personal travel.

Ride-hailing services have upended the for-hire taxi and limousine market all over the world. Intra-city for-hire travel has become more accessible, flexible, safe and, in most cases, cheaper. Most of the influence has been additive to consumers and local economies, including adding new income opportunities in the face of stagnant wage growth in most countries. While there are competitive and regulatory headwinds, and inflection to profitability is still a few years out, on-demand car services are well-entrenched in the transportation fabric of the cities.

The bull case for this sector rests on favorable technology and socio-economic trends. Mobile apps have made automotive transport more seamless and convenient. Rapid urbanization is straining the public transportation systems. Car ownership is on a decline, particularly in the highly coveted millennial demographic.

Furthermore, middle-class wages have been stagnating in the developed markets, and the commercialization of autonomous cars – by 2022, according to some estimates, but possibly much later - could change the future of transportation significantly.

Compelling market opportunity supports the strong bull case for this sector. The global ride-hailing market is expected to grow from $36 billion in 2016 to $285 billion by 2030, according to IBIS World More broadly, the traditional consumer transportation industry - comprised of car ownership, public transportation, taxis, and car rentals - is $2.25 trillion in size and primed for disruption. Ride-sharing companies are well positioned to disrupt and capture a large share of the market.

Both Lyft and Uber have carved out a strong competitive position in this growing market.

Lyft, with 1.4 million drivers in 638 cities in the U.S and 9 cities in Canada, is undertaking efforts to connect all transit nodes with its services to make overall transportation smoother, cheaper, and more convenient than its present form. The company’s North America-centric market focus has limited its market opportunity but has avoided the costly expansion strategy of Uber. Lyft estimates that majority of rides on its platform will be in self-driving vehicles by 2021 and its partnerships with major automakers, including Ford, will help it derive further cost efficiencies.

Uber, with roughly 3.0 million drivers in 65 countries (750,000 in the U.S.) in over 600 cities, and 5-times higher bookings than Lyft’s, is by far the largest on-demand car service in the U.S., and either first or second largest in most other countries where it operates. The company is investing in new markets – delivery (Uber Eats), freight (Uber Freight) - and changing patterns and expectations about human logistics. By spending heavily on R&D – including investments in mapping, payment, and robotics – and forging strategic alliances & partnerships with the major car and technology companies, Uber is staying ahead of the curve. That’s not to say that these companies aren’t facing any headwinds. The legacy regulatory framework with regard to employment laws, and the growing concern of congestion—pushed primarily by the taxi lobby—pose material risks but manageable. The additional mandatory costs such as minimum wages for drivers and surcharges could potentially cut into the value proposition of ride-hailing services if not addressed proactively, which both the companies are doing.

The year 2019 is expected to be a banner year for technology unicorn IPOs, market conditions permitting. Lyft and Uber will finally show their hand after 7 and 10 years, respectively, as private companies.