Startups have a notoriously difficult time of things, and this year has been especially tough for those going public. This episode is a good overview of markets sobering up to inflated company valuations. Last year, more than 80% of companies filing IPOs were unprofitable and a number of companies ended up trading below their IPO prices. Felix Simon, a financial Journalist at Reuters, discusses the overpricing caused by floods of cheap private capital and also how going public now happens at later stages of the lifecycle. Will we eventually witness the decline of IPOs and find more companies being valued within the private markets and raising capital there instead? On that line of thought, Simon and Emily Peck, a senior reporter at Huff Post consider the vaping company Juul that was just massively over-valued in the private market based on forecasting trends that vaping is the future while failing to price in health controversy and regulatory risk. Lastly, they consider the lack of stability of Thomas Cook and how its value rapidly plummeted as it entered insolvency. They debate the reasons for this and compare the European airline market – which is saturated with low cost airlines – to the US airline market, which has higher barriers of entry.
Why does this matter? The prospect of a tech company becoming a ‘unicorn’ has meant the market has tended to value the tech sector highly, despite the fact that many of these companies are not even close to profitability. Yet 48% of companies that went public this year are now trading below their IPO prices. This is unprecedented. Is it a shift in market psychology on how start-up companies should be valued? In contrast, the demise of Thomas Cook shows how traditional business models are also struggling to compete in an environment where technology is able to connect buyers and sellers more directly. Overall this is a challenging business environment – the market seems unwilling to pay its ‘unicorn’ premium at (and after) the IPO, but it is also losing trust in old business models.
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