What we can learn from 2019’s biggest tech IPO failure

WeWork’s failed IPO is a crucial lesson to all tech companies preparing to go public or undertake a major material event.

By ansaradaMon Nov 18 2019IPO

In 2012, the JOBS Act increased the number of shareholders permitted for privately-held companies from 500 to 2000, allowing companies to stay private longer.
 
It’s enabled major tech companies to raise funding from larger networks of investors – without the scrutiny that comes with public trading. VC investors have thrown cash at these ‘unicorns’ to get in on the action, but public market valuations have told a different story.
 
Tech IPOs have held the spotlight this year, with major players like Slack, Lyft and Uber going public with highly anticipated results. Uber and Lyft have both seen share prices plummet since their IPO as they continue to cut heavy losses, the correlation between profitability and stock performance clear.
 
Yet the promise of profitability is often just as important; Amazon and Google are among those who understood that it made sense to take on loss early so they could scale and eventually dominate an entire market. The question is whether this next generation of innovators actually has the potential to do the same.
 
An extreme example is WeWork, which managed to go from a $47billion valuation to tanking IPO within a matter of days. WeWork’s failure and the struggles of other newly public tech companies have taught us some valuable lessons.
 
1.    Pitches that work for venture capital firms won’t always work for general stock market investors.

“The reason you IPO is because you want cash, often because you have losses… Companies don’t IPO for the general public good. They do it to raise capital,” said Erin Gibbs, equity strategist at S&P Global.

Losses are tolerated by VCs because of the companies’ larger sizes compared to those previously going public; they have larger revenues to compensate. Public shareholders often want to see more evidence of profitability upfront.
 
2.    Fair governance is crucial for shareholders.

WeWork CEO Adam Neumann’s ‘supervoting’ shares allowed him to maintain immense control over the company - his shares had 20% more voting power than those available to the public. Investors were not happy; they ‘refused to buy into a dream of growth that was not backed up by the reality of cash flows and good governance’, and the IPO was dissolved. 

These companies can’t overlook shareholders’ rights if they want their capital. WeWork’s spectacular failure is being heralded as a shining example of effective market discipline.
 
3.    No company is exempt from public scrutiny.

“Budding tech unicorns must understand the level of scrutiny increases exponentially once their shares hit the market.”

Limiting risk and ensuring compliance is essential for operating in capital markets, but it’s a task that’s impossible without proper control of governance.

Concerns regarding WeWork’s weak corporate governance standards were uncovered in the pre-IPO phase. Ultimately, any red flags or opacity in material information will not satisfy the public market.
 
4.    Preparation is critical.

Many companies underestimate the time and effort required to prepare for an intense event like an IPO - particularly the establishment of strong governance, which should be undertaken long before IPO is even a consideration. (WeWork CEO Adam Neumann might have realized this if he had taken the time out of his surfing trip to focus on the task at hand.)

In order to address the gaps early, companies must have real-time and historical access to data enabling them to satisfy shareholder concerns and prove that their business model is sustainable.

If all this data and documentation lives across a combination of emails, Excel spreadsheets and disparate filing systems, they’ll never get the quick access or visibility they need to meet the demanding requirements. Automating and integrating these processes is a major advantage. 

 
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