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When ridehailing startup Lyft had its initial public offering on Friday, it became the first of a wave of travel companies considering going public during the next few years.
Later this spring, Uber is expected to make its public debut, ending what has been a drought of travel company listings. Rare exceptions were an IPO for online travel agency Despegar last September and one for Veltra, the Tokyo-based tours and activities booking service, in December.
Some travel companies that may go public include lodging-rental giant Airbnb, budget hotel network Oyo, online travel agency Traveloka, payments provider Affirm, business travel booking companies TripActions and TravelPerk, tours-and-activities travel agencies GetYourGuide and Klook, ride-sharing platform BlaBlaCar, travel reseller Secret Escapes, property management service Vacasa, multi-modal search company Omio, and digital concierge services provider Hi Hotels/Tink Labs.
So what can they all learn from Lyft, which pushed ahead of the pack with its offering but then saw its shares fall below its IPO price in subsequent days?
The stock’s decline since Friday has tempered some of the early enthusiasm but there are still believers.
“Lyft’s IPO is an inspiration for founders,” said Chris Hemmeter, managing director of Thayer Ventures.
Here are five lessons travel startups might draw from Lyft’s trajectory to an IPO.
Losses Are Acceptable Up to a Point
Being profitable isn’t a requirement for a reasonably successful initial public offering, as Lyft’s example suggests.
Lyft lost $911 million on revenue of $2.2 billion in 2018. Despite the losses, Lyft debuted at $72 a share and then rose to $88.60 on its first day of trading.
“Right now, several companies have not so much earnings now as the promise of earnings,” said Erik Blachford, a venture partner at TCV (formerly Technology Crossover Ventures) and a former founding CEO of Expedia. “In these cases, it becomes a question of how much you believe that promise, and there’s going to be quite a bit of debate around that for many of these startups.”
Travel companies struggling to balance growth with profitability will watch Lyft’s stock performance closely. On Tuesday Lyft’s stock price closed at $69.
Last year, more loss-making companies went public than at any time since 2000, said Jay R. Ritter, a finance professor at University of Florida, Gainesville, who has tracked U.S. IPO data since 1980.
“Losses are more tolerated because the companies going public this year are much more mature and bigger,” said Erin Gibbs, equity strategist at S&P Global Market Intelligence. “They have significantly larger revenues, so larger losses can be tolerated. Historically, companies with more revenue have a greater likelihood of surviving.”
While Lyft debuted seven years ago, the median age for tech companies that went public last year was 12 years, said Ritter.
Valuations Are Tricky
On Tuesday, Lyft’s stock price fell on Tuesday after an analyst at Seaport Global said its valuation assumed an “overly optimistic view” of how soon consumers may replace car ownership with ridesharing.
Fair or not, the critique served as a reminder to other startups that pitches that work for venture capital firms may not always work for general stock market investors. On average new stocks pop on their first day of trading, then underperform the market for the next three years, Ritter’s data shows.
Traditional methods of analysis sometimes stumble when it comes to assessing the value of a startup for private funding rounds. Case in point: Airbnb’s valuation has jumped around in different funding rounds.
Traditional IPOs Have Their Perks
Last year, Spotify bypassed the customary path to an initial public offering by directly listing its shares, and Airbnb is said to be mulling a similar move.
The relative smoothness of Lyft’s debut highlights the advantage of the standard process.
“Since the mid-2000s, there have been some experiments with direct listings, but these have been typically limited to smaller offerings,” said Richard Peterson, an analyst and author of a book on IPOs. “The vetting by banks and auditors under a regulatory regime gives confidence to investors, and what you gain on pricing by cutting out fees and so forth you may lose in investor trust.”
In short, startup founders often criticize the establishment, but when it comes to IPOs, many may choose to play by the long-standing playbook.
I-P-Oh: Keep Your Eye on the Prize
For tech companies like Airbnb, IPOs not merely give payouts to early investors and, eventually, employees but they also provide fuel for further growth.
“An open and fluid IPO window is a net positive for all of us,” said Hemmeter. He and Thayer did not fund Lyft. “We need the liquidity pull-through to drive innovation, even at the startup level.”
“The reason you IPO is because you want cash, often because you have losses,” said Gibbs at S&P Global. “Let’s not forget that companies don’t IPO for the general public good. They do it to raise capital.”
Going public also clears a path for mergers.
“For companies like Airbnb, Lyft, and Uber, there is a so-called ‘network effect,’ which tends to make for ‘winner take all’ markets,” said Ritter. “Because Lyft and Uber have these network effects, I predict that in North America, where they compete head-to-head, these two companies will eventually merge. The only question is when and at what price.”
Sooner Is Better
Travel companies looking to copy Lyft’s route to the public markets may want to keep two things topmost in mind.
“If you can get out there sooner, do it this year,” said Blachford. “You want to make sure investors are willing to accept what you have to offer. You don’t know what 2020 has in store.”
“But you also need to make sure your internal systems are such that you can deliver consistently on the promises you make,” said Blachford. “That takes a certain operating discipline, and not all companies have that.”