Startup CEOs heading to the public markets have a love/hate relationship with their investment bankers. On one hand, they are helpful in introducing a company to a wide range of asset managers who will hopefully hold their company’s stock for the long term, reducing price volatility and by extension, employee churn.
On the other hand, they are flagrantly expensive, costing millions of dollars in underwriting fees and related expenses.
Worse, the advice one gets from investment bankers tends to be quite vague. There is all this talk of IPO windows, timing, pricing, and more that is so squishy, particularly for the sorts of Silicon Valley CEOs that prize data over human experience. That has led to more than one experiment to try to disrupt the investment banking sector and the whole going public circus.
Uber and Lyft though are proof though that investment bankers actually are pretty smart in their advice about the pubic markets, and founders should be cautious about ignoring their words.
Let’s look at a few case studies.
First, take the vaunted “IPO window” that is discussed ad nauseam among investment bankers and the financial press which covers them. The idea of the “window” is that you must time a new public equity issue to arrive at a propitious moment in the markets. You want investors who are hungry for growth, and not battening down the hatches preparing for a recession.
In this analysis, it’s not just about pricing the issue well, but also whether you can go public at all. In turbulent markets, investors don’t lower their target prices, they refuse to buy at any price. For tech startups — the vast majority of which are hemorrhaging cash as they reach the stock exchange — there is a real risk that delaying a public offering can make remaining a going concern tough.
Isn’t that just bunk though? Aren’t markets rational? Don’t companies like Lyft and Uber have sway in the market and will always attract investment? Uber, which is one of the largest IPOs of all time, could have theoretically gone public at any time and made it a major event. That scale has even led to some investors declaring that tech startups have killed the IPO window, since they hold all the future growth that investors cherish.
Well, the results are in, and the reality is this: IPO windows matter, and they matter a lot. And those windows can prove extremely fleeting.
When Uber announced it was going public on April 11, it seemed to be the perfect time. Employment was up, growth was up, the markets were doing well. The S&P 500 even hit a three-month high in late April/early May, almost perfectly setting up the company for its debut.
And then Trump hit the tariffs button just hours before Uber was set to price, and the market cratered.
Uber went from a high of $45 a share mid-Friday to a low of $36.08 on Monday morning — a 20% decline — making it instantly one of the worst IPO debuts of all time.
Now, investment bankers can hardly predict Trump’s actions on China or other geopolitical/macro risks (and it’s not like Trump’s own staff can predict what he is going to do, either). But to me, the lesson here is that even Uber, the most valuable U.S. startup by a long shot, struggled mightily in its opening days because the IPO window shattered in its face.
That window still exists, and it is critical to nail the timing. When investment bankers talk about IPO windows, they are coming from a place of experience.
Let’s direct our attention to another case. For the past two years, there has been talk of a race between Uber and Lyft to reach the public markets first, a topic that even earned a full explainer in Vox (which, however, never bothered to explain why they were racing to go public). Uber and Lyft, at least reportedly, filed with the SEC at practically the same time.
Ultimately, Lyft went public just a bit faster than Uber, and wow, was that timing important.
Since the company’s debut in late March, Lyft has been on a serious downward trajectory, shedding about 40% of its value from its high point. Yet, despite that price crash, Uber was able to go through with its public offering mostly unscathed (at least until the IPO window closed).
Imagine the counterfactual now: that Uber went public first last week, and Lyft was coming up in a week or two. The IPO window is now much more tight, and Uber’s performance in the pubic markets is abysmal. Lyft, the weaker company in the ride hail space, now has to navigate these treacherous currents while also convincing investors that its cash-bleeding business model can somehow turn the corner.
Maybe it would still debut. Maybe it would just have to offer a far weaker price and raise less money. Or maybe, its debut would have been essentially blocked entirely.
Regardless, the race to go public was vitally important for the survival of Lyft. Again, the investment bankers and the financial press who drummed the beat of this race were spot on. That timing really, really mattered for the ultimate success of Lyft’s equity issue, if perhaps a bit less so for Uber.
The IPO window and race both indicate that investment bankers — for all their faults — aren’t (always?) inventing contexts to extract additional fees. Even with more and more algorithmic trading, markets are ultimately human in origin and design, and they respond to the emotional whims of those traders. The art of reading those humans is presumably what founders are spending millions of dollars in underwriting fees on. At least in the case of Uber and Lyft, that advice appears to be worth the cost.
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