WeWork, Lyft, Uber, Peloton: To their early backers, these are companies that would transform the way the world works, works out or gets around.
To public stock investors, they are companies with inflated valuations and real questions about when they will start making money.
The two views have collided this year, disastrously in WeWork's case. After it failed to sell its stock to the public last month, throwing its funding plans into disarray, the company was bailed out Tuesday by SoftBank, its largest outside investor.
SoftBank's takeover values WeWork, which leases office space to co-working tenants, at about US$7 billion ($11b). That is a far cry from the US$47b that the company was valued at in January.
WeWork, which is based in New York, might be the most extreme example of the rebuke that public stock investors have delivered to high-flying startups, but it is hardly alone.
Across Wall Street, in Silicon Valley and at some of the world's largest companies, a reckoning is unfolding as valuations slide for the so-called unicorns — startups worth at least US$1b — that everyone was once so eager to buy.
Since going public this spring, Lyft and Uber have shed about US$40b in market value and are trading well below their private market valuation. SmileDirectClub is trading at about half of its IPO price, and Peloton about 23 per cent below its debut.
And since 2011, one-third of startups valued at US$1b or more priced their IPOs below where they were in their last round of private fundraising, according to data provider PitchBook. A year later, nearly 40 per cent of the unicorns that have gone public are valued at less than their final private market value.
Even before WeWork was bailed out, its struggle to go public had caused some of its early investors to write down the value of their holdings. In recent weeks, Goldman Sachs and Jefferies, a smaller investment bank, reduced the value of their stakes in WeWork by about US$80 million and US$146m during the third quarter. Both investments remained profitable at the end of the third quarter.
And those who bought shares of some of the most valuable startups during later funding rounds are in many cases underwater. A 2017 investment in Lyft by mutual fund giant Fidelity valued the company's stock at about US$47.35, according to EquityZen, a marketplace for private stocks, while Toyota's investment in rival Uber last year valued that company's stock at US$48.77.
On Friday Lyft's stock closed at US$44.54, while Uber's ended the day at US$32.71.
All of this is fallout from an investment bubble that had formed in the private markets that fund startups, as big investors with billions of dollars piled in. Behind this wave of investment was a change in rules on private investments, record-low interest rates and a fear of missing out on the next transformational tech company like Google or Amazon.
Fund companies including Fidelity and T. Rowe Price, which had typically invested only in public companies, started taking part in private funding rounds — and so-called megafunds, which could make huge bets on a single firm, most notably SoftBank, were born.
Soon the sums raised in private markets were dwarfing the money from IPOs. Over the past six years, companies have raised about US$550b from venture capital funds, easily exceeding the US$320b of proceeds generated from IPOs over that period, according to data from PitchBook and Dealogic.
But the private money meant companies could grow without the scrutiny of public market investors — no quarterly financial updates or demands for proof that they would find a way to become profitable. Now that they are moving into the glare, it has become evident that a number are still far from being ready to live up to the market's demands.
"These companies are still not mature," said Kathleen Smith, principal at Renaissance Capital, which provides research on IPOs and manages exchange-traded funds that track their performance. "Maturity isn't measured by the number of years you have been around. It's measured by whether you can earn money. That's maturity."
Written by: Stephen Grocer
Photographs by: An Rong Xu
© 2019 THE NEW YORK TIMES