Sep 24, 2020
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Use These 3 Tests To Pick The IPO Winners

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Sign at office park for venture capital firms in Silicon Valley Menlo Park California including. [+] GETTY Venture capital investment rises and falls with the public s appetite for IPOs. And with 2019 venture-backed IPOs falling way below the market averages it appears like the cycle is set to head south


That doesn’t mean there are no recent IPOs worth investing in. Only that you could benefit from knowing how to distinguish the winners from the losers. The losers are Uber and Lyft while the winners are Pinterest and Zoom Video. (I have no financial interest in the securities mentioned). 2019 is proving to be a record year for U


S. venture capital investment – with $55 billion raised throughout the first half – well above the mid-point for 2018 which ultimately saw $116 billion raised – just about the record $120 billion raised in 2000 in line with the PWC MoneyTree Report. But will that flood of VC money keep pouring in if the businesses disappoint investors when they go public? That disappointment should be growing


After all shares of technology startups and other companies that went public in the U. S. this year are trading roughly 5% above on average their prices at their initial public offerings well short of the 18% gain in the S&P 500 index reported the Wall Street Journal. Goldman Sachs reported that that is the worst IPO-stock performance since at least 1995


And that has replaced the terror of missing out with the terror of losing everything. Rick Kline the co-chair of law firm Goodwin Procter LLP s capital-markets practice told the Journal I don t see lots of deals which are likely to go out the rest of this year. The market sentiment has changed


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1 billion on U. S. exchanges this year are poor performers. What makes the adaptation between Uber and Lyft – that have punished investors who bought into their IPOs by falling 29% and 50% respectively – and the winners like Pinterest and Zoom Video that have risen 11% and 23% respectively since their IPOs? Why the Winners Win And the Losers Lose My guess is that investors have had it with decelerating companies that burn through cash to sell easy-to-copy services at a cost that’s way below their costs


Instead they favor fast-growing companies that could make money – or at least are on a clear route to profitability. Uber and Lyft are growing more slowly losing money and burning through cash. For the 1st 1/2 2019 Uber s revenues grew a modest 19% to $5. 4 billion while it posted a whopping $6


2 billion loss and burned through $450 million in cash from operations. During the same period Lyft s revenues grew— up 82% to over $1. 6 billion— while its net loss popped a whopping 331% to $1. 78 billion as its operations consumed $70 million in cash. Pinterest grew fast and is getting toward cash flow break-even


Its revenues for the second one quarter of 2019 increased 62% to $261 million while its cash flow burned from operations fell from $29 million to $16 million. Its net loss for the second one quarter of 2019 of $1. 1 billion included $1. 1 billion in share-based compensation in line with its latest quarterly statement


And Zoom Video is doubling and making money. For the six months ending July 2019 Zoom s revenues nearly doubled to $268 million while it made a profit of $5 million and threw off $53 million in cash from operations in line with its latest quarterly statement. How To Screen For Winners If your ambition is to make money buying into IPOs don t make the same mistake as people who bought Uber and Lyft did


They let their emotional connection to these services convince them that their stock would be a superb investment. My advice is to figure out how a company got to an IPO before deciding whether to invest. As I wrote in my book Scaling Your Startup there are four stages to scaling from a concept to a large fast-growing public company


Winning the 1st customers (which is self-explanatory)
Building a scalable business model (selling marketing and servicing more efficiently so you will be able to grow revenues while controlling costs)
Sprinting to liquidity (expanding rapidly with the aid of outdoor capital) and
Running the marathon (sustaining over 20% cash-flow positive revenue growth after going public)


Don t invest in companies that skip from the 1st to the third stage of scaling. Only invest in IPOs of businesses that completed the second one stage of scaling before pouring gasoline on their businesses. How can you tell? Here are three tests: Is the company simplifying its business processes — together with sales marketing customer service and product development — so they are faster better and less costly?
Has the company hired executives who ve done this successfully in previous jobs?
Is the business cash flow positive or at least getting less cash flow negative as it grows? It s too late for Uber Lyft and WeWork to make their business model scalable


But if Zoom can sustain its rapid profitable growth and Pinterest can become cash flow positive while growing fast their shares are likely to rise

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