How today's tech IPOs differ from the dot-com boom

WHEN Uber begins trading on Friday, it will cap one of the largest-ever tech initial public offerings (IPOs) and join a crowd of big-name startups making their stock market debuts this year.

Not since the dot-com boom have so many richly valued tech companies gone public in such short succession: shares of Lyft and Pinterest are now trading, and Slack, WeWork and Palantir are expected to follow soon. But this crop of tech companies is markedly different from those that came up during the late 1990s.

Many rode the rise of mobile connectivity and cloud computing in the last decade to multibillion-dollar valuations. They are more mature, having spent years as private companies building their businesses. But a number remain deeply unprofitable, and the time they spent in the private markets, increasing in size and value, has ultimately raised questions about where they go from here.

By staying private for longer, tech startups have been able to avoid public scrutiny

When Netscape, Yahoo and Theglobe.com, a now-defunct online network of "virtual communities", went public in the late 1990s, none had been around for more than three years. When Lyft began trading on the Nasdaq in late March, it had been in business for about seven, and it was young compared with others. Uber, PagerDuty and Pinterest have all been operating for at least a decade.

There are a number of explanations why companies are staying private for longer. Some point to increased regulation of public companies. Others note how record-low interest rates after the financial crisis pushed investors into private markets, increasing the amount of money available for funding rounds.

But by relying on venture capitalists and other investors to finance their operations, startups have had more runway to figure out sustainable business models while avoiding the public eye.

Today's tech startups going public have built big businesses as private companies

Not surprisingly, the startups in this IPO wave are more valuable.

The average stock market valuation of the venture capital-backed tech companies going public in the United States this year is US$9.6 billion, according to CB Insights, a company that tracks startups. Their combined value could exceed US$150 billion by year's end.

Lyft, which raised about US$5 billion, went public with a valuation above US$20 billion. Investors handed Uber even more - about US$15 billion in all - and the company was valued at more than US$82 billion when it priced its public offering on Thursday. Amazon and Yahoo, by contrast, were worth less than US$500 million at the time of their IPOs.

Much of the startups' growth may be behind them

Investors have long made bets on companies that promise to revolutionise how people shop, travel and consume media. Two decades ago, many ignored the relative youth and financial outlook of the startups they were backing. For some, the bets paid off: Amazon, eBay and Google trace their roots to the dot-com boom. But the period also produced many high-profile flops like Webvan and Pets.com.

Unlike those busts, highly valued tech companies today are more established, and many of them are drawing billions in revenue. Still, not all seem like sure bets.

Sales growth for several of the startups appears to be slowing. Last year, for example, Uber's revenue rose 42 per cent from the year before; in 2017, revenue more than doubled from 2016. By comparison, Netscape, Amazon, eBay and Yahoo combined generated less than US$100 million in revenue when they went public. But they were on the upswing, and in the three years after their IPOs, their revenues surged by more than 10 times.

Slowing revenue growth doesn't necessarily mean investors who buy in at the IPO price will miss out on big gains. Some investors worried about Facebook's slowing revenue growth when it went public in May 2012. But three years after the debut, its revenue had tripled and its share price had more than doubled.

But the slowing growth of this new generation has raised questions about whether some of them will become profitable soon.

Being unprofitable is hardly a new phenomenon. Startups have often lost money as they go public, but the losses by some in the current group are particularly steep. Lyft lost nearly US$1 billion last year, among the largest by a company in the year before it went public. And Lyft's loss is not the largest of those planning IPOs. WeWork lost US$1.9 billion last year, and Uber lost US$1.1 billion in the first quarter alone.

Today, regardless of their profitability and with less need to raise cash, many of these companies are going public largely to provide their founders, early investors and employees an opportunity to cash in at what are already very rich valuations.

Those shareholders who got in early stand to reap a windfall.

Whether further big gains will continue to materialise for those buying shares in the public markets remains a question. NYTIMES

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