The so-called “unicorns” that lured big investments and took Silicon Valley by storm are facing a chillier environment as they turn to Wall Street for fresh capital.
The start-ups earned the unicorn moniker for quickly reaching valuations of more than US$1 billion without hitting public markets, considered a rare feat until a few years ago.
Yet some of the most prominent unicorns have stumbled on Wall Street, with investors cautious about their profit potential, as well as an uncertain economic outlook.
Uber Technologies Inc, which was the biggest of the unicorns and had hoped for a valuation of US$100 billion, is worth about half that now, and its shares have skidded about 30 percent since its initial public offering (IPO) in May.
Rideshare rival Lyft Inc has fared even worse, with a 40 percent drop since its IPO early this year.
WeWork parent We Company, another massive unicorn valued at about US$47 billion based on private funding rounds, shelved plans for its IPO this month and replaced its chief executive officer Adam Neumann after a series of missteps and governance questions surrounding the fast-growing office-sharing start-up that spooked investors.
Some of the big unicorns might have waited too long to list on Wall Street, Manulife Asset Management Ltd portfolio manager Nathan Thooft said.
“Some of these big names like Uber have had their fastest growth in the past,” Thooft said. “They had massive growth in the pre-IPO years. They’re coming to the market at a time where their growth is actually slowing.”
The chilly reception for the biggest start-ups has created a tough environment for other privately funded start-ups.
Connected fitness equipment maker Peloton Interactive Inc, seeking to ride the unicorn wave, lost 11 percent as it began trade on Wall Street last week.
SmileDirectClub, a teledentistry start-up offering orthodontics, has also seen big losses since its IPO earlier this month.
Amid this unwelcoming environment, Airbnb Inc, one of the biggest unicorns still on the sidelines, recently said it would hold off on its IPO until next year.
Hollywood agency Endeavor Group Holdings Inc, another start-up with a multibillion-dollar valuation, postponed its planned IPO at the last minute.
Despite some of the high-profile stumbles, the IPO market has been generally positive.
Newly listed firms this year are up 25.4 percent compared with the broad market rise of about 20 percent, Renaissance Capital Ltd said.
Success stories include the video conferencing start-up Zoom, up 110 percent in the past five months, and the vegan protein maker Beyond Meat Inc, which has gained 500 percent since its April listing.
Garrett Black, an analyst at financial research firm PitchBook Data Inc, said the start-ups need to offer a clear view of their business plan when they come to Wall Street.
“Basically, companies will be forced to be more disciplined with their capital when it comes to spending, as well as scrutinize their balance sheets and growth paths much more closely,” Black said.
That is a shift from raising money from venture investors who are looking for growth, but willing to take greater risks, he added.
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