Are we building the next dot-com bubble?

Lyft co-founders John Zimmer, front second from left, and Logan Green, front second from right, cheer as they as they ring a ceremonial opening bell…
Lyft co-founders John Zimmer, front second from left, and Logan Green, front second from right, cheer as they as they ring a ceremonial opening bell…
Image: AP Photo/Ringo H.W. Chiu
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You could be forgiven for thinking startups had stopped going public.

Travis Kalanick, Uber’s notorious co-founder and former chief executive, famously said he would take the company public as “late as humanly possible.” “It’ll be one day before my employees and significant others come to my office with pitchforks and torches,” he said at a conference in June 2016. “We will IPO the day before that.”

Kalanick had a point. Why, after all, would a company like Uber bother with public markets? Companies traditionally go public to raise money, but the Ubers of the world have enjoyed a seemingly limitless capacity to attract funding from private investors. Uber has, at last count, secured nearly $20 billion in private financing, and surely there is more where that came from.

Going public is also a headache. Accounting practices must be tidied, legal disputes settled, and securities regulations complied with. Being public means a lifetime of quarterly earnings reports, investor meetings, and public handwringing over your stock price, not to mention threats from activist shareholders. Executives of public companies can go to jail for disclosing information that was casually bandied about during their startup days.

And yet here we are, in what promises to be a banner year for the tech IPO. Many of the biggest names in Silicon Valley—from Pinterest, to Slack, to yes, even Uber—are expected to complete the journey from startup to public company this year. These companies are taking this step amidst fears of the next recession, though for the moment stocks continue to chase new highs.

“It’s like keeping up with the Joneses,” says Lucas Puente, lead economist at Thumbtack, an online marketplace for small businesses. “That’s definitely the case with Uber and Lyft. Once one does it, the other has pressure to do it as well.”

A bunch of tech IPOs going public at once—at least partly because other companies are doing it—may inspire a bit of cautionary déjà vu. From 1995 to 2000, hundreds of technology companies went public each year. The frenzy peaked in 1999, when 376 technology companies completed US-listed IPOs collectively raising $40.8 billion, according to data from research firm Dealogic. Those listings included Linux software distributor Red Hat, online grocery service Webvan, and wireless phone software provider Phone.com. Around the world, a total of 702 tech companies debuted in 1999, raising a cumulative $58.7 billion.

The era did not end well: The dot-com bubble burst. The tech companies that rushed to IPO in the late 1990s and early 2000s were very young and largely hadn’t figured out how to make money. When the market cratered, it took companies that were bleeding money like Webvan, Kozmo.com (on-demand anything), and Pets.com (online pet supplies) with it. The market for tech IPOs never really recovered.

Like their dot-com predecessors, this year’s tech IPO candidates have a facility for losing money. Lyft, which went public on March 29, lost $911 in 2018 on $2.2 billion in revenue. Pinterest narrowed its net loss over the last three years, but still finished 2018 with $63 million in the red. Uber lost nearly $2 billion in the second half of 2018, according to details the company has shared with investors.

These are big numbers. Even Amazon, a famously unprofitable company, didn’t lose money on the same scale. Amazon lost a total of $2.8 billion over its first 17 quarters as a public company. Uber lost $4.5 billion in 2017 alone.

Technology startups have been able to lose so much money because there are even more investors willing to provide it. As those losses might make clear, the availability of funding over the last decade isn’t necessarily healthy. After zero tech companies went public in the first quarter of 2016—a freeze not seen since the Great Recession—venture capitalist and Uber investor Bill Gurley fretted that companies were choosing complex, private investments over IPOs.

“Many founders have been erroneously advised that IPOs are bad things and that the way to success is to ‘stay private longer,’” Gurley wrote. “Not only is an IPO better for your company… but an IPO is the best way to ensure the long-term value of your (and your employees’) shares.”

But despite these tech companies’ apparent aversion to profitability, there are important and reassuring ways in which this year’s tech IPO boom differs from the dot-com bubble.

The current crop of companies are bigger (paywall) than their 1990s-era predecessors, with a median 12 years of age compared to four or five. Their median sales are about $170 million, more than 10 times the median $12 million of two decades ago. This year also looks like it will be about a relatively manageable number of very big deals, versus the hundreds of tech IPOs that happened in the late ’90s.

Today’s companies are also more mature. Uber has effectively acted like a public company for the last several years, disclosing financials to investors and press on a quarterly basis. The shareholder revolt that led to Kalanick being pushed from Uber and the company’s highly public apologies and investigations into its own culture were also moves you’d expect more from an established public firm than a young private one. Airbnb has been profitable on an EBITDA basis (earnings before interest, tax, depreciation, and amortization) for two straight years.

Private money is still available for those who want it. The We Company, formerly WeWork, in January secured $2 billion from Softbank. The following month, food-delivery company DoorDash raised $400 million. Still, the industry seems to have agreed, collectively, that going public is the right move, and this year the right time. The companies, rather than jumping onto public markets before they’ve barely been established, as did the companies of the dot-com bubble, are a bit more likely to have outgrown their reliance on private money and the relative shelter from scrutiny that comes with it.

The readiness of tech companies to go public has undoubtedly been hurried along by the readiness of their investors and employees. Companies like Uber and Airbnb were able to forestall an IPO for a few years by facilitating secondary stock sales for employees that gave them a chance to convert some of their equity holdings into cash. But such transactions are complicated and difficult to orchestrate on a large scale, making them more of a patch than a permanent fix.

“The owners of these businesses (employees and investors) have obtained substantial wealth and value and the flexibility to diversify or utilize/consume some of it,” Chester Spatt, finance professor at Carnegie Mellon University’s Tepper School of Business, tells Quartz in an email. “The IPO process unleashes liquidity for these owners of highly-valued enterprises.”

Gaining liquidity is all the more urgent with the possibility of a recession or other economic downturn on the horizon. Company management, employees, and early investors are typically subject to a “lockup” period after an IPO that requires them to hold onto their stock for a certain period of time, often of 180 days. The goal of this lockup is to prevent shareholders with a large amount of stock from immediately dumping their holdings, which would depress the company’s share price. It also means that shareholders subject to the lockup must hope the stock is still doing well six months out from the IPO, or their equity stakes could be much less valuable.

The benefits of liquidity don’t stop after the lockup period ends. Hiring top-tier talent, for instance, can be easier when the compensation package includes shares that trade on the public market instead of stock options or restricted stock units that might be worth something in the vague and distant future. If the last few decades of IPO sluggishness have taught us anything, it’s that for startup employees, big paydays don’t come around that often.