Why Big Budgets Can Lead To Low Returns

WeWork is grabbing all the headlines for its failed attempt to continue the illusion that it’s worth tens of billions of dollars. As it tried to make the transition from a private company to a public one, investors simply weren’t buying it.

But the problem isn’t just WeWork. This year has seen a number of high-flying startups come crashing down to earth after their overhyped IPOs. Uber (UBER), Lyft (LYFT), Peloton (PTON) and Slack (WORK) have all lost value since they IPO’d.

What’s wrong with the IPO market?

The answer lies with the IPOs that did well. And, yes, some actually did exceedingly well…

  • Zoom (ZOOM) has gone from an offering price of $36 to $77, a 114% jump.
  • Beyond Meat (BYND) did much better, going from $25 per share to $149, a 496% leap.
  • Pinterest (PINS) has gone from $19 to $26 per share, a 37% increase.

It’s not all doom and gloom. So what separates the rising post-IPO stocks from the falling post-IPO stocks?

It’s not profits. Of the three companies mentioned above, Zoom makes a profit, but Beyond Meat and Pinterest don’t. Neither do the underperforming Uber, Lyft, Peloton or Slack. In fact, the vast majority of companies that join the public market are not profitable at the time of their IPO. Yet some of these companies do much better than others.


The surprising answer is that it may have little to do with whether revenue growth is accelerating or slowing… whether costs are rising or falling… or whether competitors are stealing market share. IPOs over the past decade reveal an interesting pattern…

  • Beyond Meat (BYND) raised a paltry $122 million. It’s up 496%.
  • HCA Healthcare (HCA) went public in 2011 at a price of $30 per share. Its current price is $119, a tick under a 4X increase. It raised $9.1 million during its private company days.
  • Etsy (ETSY) is up 253% since it IPO’d back in 2015. It wasn’t profitable at the time. But its total pre-IPO funding was $97.3 million.
  • Silk Road Medical (SILK) went public this year after raising $160 million before its IPO. It’s up 129%.
  • Cortexyme (CRTX) raised $100 million before going public this year. It’s already up 127%.
  • Zoom (ZOOM), besides being profitable, raised only $161 million. It’s more than doubled in price this year.
  • PagerDuty (PD) IPO’d this year after raising $173.6 million. Its shares have since gone up 93.6%.
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Disclosure: None.

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