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Unicorn IPOs: Pot of Gold at the End of the Rainbow?

In this report, we deep dive into eye-catching publicly tradable securities, unicorns. With greatly anticipated startups like Slack, Airbnb, Pinterest and WeWork stirring rumors of going public in 2019, we investigate if past unicorns can extend pass their success post-IPO.

MioTech Research2019-04-12

The year of 2019 is the highly anticipated year for unicorns, privately funded startups with a market value of US$1 billion, to come marching into the public market. Despite the market for tech IPOs being less than favorable due to market volatility at the end of 2018, and the U.S government shut down in January, it hasn’t stopped some startups to go public.

Beating Uber to the IPO chase, Lyft on March 28 became the first big-name unicorn to list its shares, priced at US$72 each. Other highly anticipated startups likely to follow suit this year include Slack, Airbnb, Pinterest, WeWork, who have all indicated their interest in taking the company public in the near future.


Source: MioTech Report

According to UBS, 2019 could be the year of the unicorn, with the potential of more than 100 tech unicorns going public. Renaissance Capital have a bolder outlook, finding in February that more than 220 private companies looking to go public. With this fierce unicorn stampede, Renaissance found that this year’s IPO proceeds will hit $100 billion, breaking the record of US$96 billion in 2000. It found that by March, the list of companies targeting 2019 IPOs to have an aggregate valuation of US$700 billion.

But for those looking to ride the unicorn, apart from looking into the company's earnings or sales, or where it decides to list, it’s important to analyze whether past unicorns are able to extend their success from the private market to the public market. While it means a massive payout for co-founders, early investors, sovereign wealth funds and venture capitalists, but digging deeper, does it translate to a company’s profitability post-IPO?


Source: MioTech Report

In this report, we consider the performance of share price pre and post IPO, as well as the improvements in operations and profitability after raising public capital. Looking at revenue growth specifically, over 70% of unicorns reported a positive revenue growth in the first three years are IPO.



Source: MioTech Report


But if we take a closer look and compare the yearly growth against the previous period, we found that more than half of the unicorns had decelerated in their revenue growth. We believe that the revenue underperformance could be partly attributed to window dressing before IPO that is likely to make up the financial numbers. It is important to note that the numbers assigned may also have been established for beneficiaries who are looking to cash out post-IPO.


Source: MioTech Report

Looking at EPS growth which has already factored in the equity dilution effect from issuing additional equities, the results were not impressive at all. After tracking the earnings growth of 16 unicorns which has been listed for more than a year, 50% of the companies reported EPS growth in the next year after IPO.


Source: MioTech Report

Only about 20% of companies recorded EPS improvement in the second year after IPO. The results seem to contradict the general purpose of going public which is that raising additional capital is better for business growth.

To conclude, it’s important to remember that while a new public offering may be the best vehicle for founders and private shareholders to receive a return on investment, for investors buying the new unicorn public offering, it may not be the pot of gold they’re hoping for at the end of the rainbow. The interests of the shareholders of the once private firm and those buying on the now public firm can diverge. Once the IPO is over, the renewal and recreation of a company's equity strategy begins.

So when it comes to avoiding a sharp flopping after IPO-popping, investors should ask: have these companies exhausted their potential value growth in the private markets? As Pamela Rosenau, chief investment officer of the Rosenau Group, who predicted the sudden market volatility in 2018, says, “A number of unicorns are supposedly going public this year. I think they should stay in the mythical world, and not part of investors’ portfolios.”

Download the report to find out more on the upcoming startups expected to IPO, the price performance of past unicorn IPOs and the financial results of listed unicorns below.