Public investors stay in love with tech, as Root and Affirm file to IPO

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Why are there so many tech IPOs right now? Startups are finding that they can get higher valuations from public markets than private ones these days, because so many public investors want to put serious money in tech. Also, the lure of the future, the benevolence of the Fed, the retail investor boom, the sheer number of unicorns that have been waiting for any decent moment to go, the new ways a company can go public… these are some of the reasons Alex Wilhelm found after reviewing the latest listings and quarterly data about tech in public markets.

Various political and economic turmoils threaten to end the run, but the impact to the startup world has arrived. Consider it for a minute before the newsletter dives into stocks, SPACs, emerging industries and other useful startup news.

From this IPO boom, there’ll be another wave of startup employee wealth flooding into adjacent real-world spaces, but spread more broadly outside of the Bay Area than the days of Facebook and Twitter IPOs. Some of those employees will become investors and maybe founders, and the now-public startups will replace those positions with big-company people. The dynamics around tech hiring will be further reshaped in surprising new ways, all combined with the other changes happening like remote work.

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Today, if you’re founding a startup now, you can now confidently chart new ways to build your company long-term that previous generations of founders could barely imagine.

This coming decade, we might see a startup go public that raises from pre-seed rolling funds first, pulls in newly legalized crowdfunding, matches with the right VCs from among the thousands that have are operating these days — or perhaps the startup raises debt because it’s doing that well. It could stay private as long as it wants using the various financing and secondary market possibilities that have been figured out over the last decade. Then, when it is ready to go public, it could choose between traditional options, the perfect SPAC and a direct listing, and keep the shareholder pool in favor of the true believers who have been with the company over the course of the journey.

This current group of IPOs also demonstrates something else. Tech is no longer defined as some profitless, highly valued consumer tech startup in San Francisco. It can come from anywhere, it can solve practical problems, it can make real money, and it can keep building and growing — provided you’re okay with some ongoing risk. No wonder public markets like tech these days.

Take a look at Root Insurance, an insurtech unicorn that has already helped define the Columbus, Ohio startup scene. It’s a “startup Rorscach test,” as Alex details this week about its new IPO filing. “You can find things to like (improving adjusted margins! revenue growth!), and you can find things to not like (spiraling losses! negative margins!) very easily.”

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It appears that the tailwind that many insurance providers have seen during COVID-19 has provided Root with a nice boost (driving fell during the pandemic, leading some insurance providers to return premiums.) Root is taking advantage of the moment by filing when it can show sharply improved economics.

That’s smart. But how do those improved economics bear out in traditional accounting? Let’s find out:

Root’s revenue has skyrocketed from $43.3 million in 2018 to $290.2 million in 2019. In the first half of 2020, Root managed $245.4 million in revenue, up 135.73% from what it managed in the first half of 2019.

Root’s losses have also shot higher, from a net loss of $69.1 million in 2018 to $282.4 million in 2019. The startup has managed to consistently lose more money over time. This was also true more recently, when its H1 2020 net loss of $144.5 million dwarfed its H1 2019 loss of $97.0 million.

The other filing this week is for Affirm, which provides a point-of-sale credit for customers (without all the tricks of credit cards). It’s also a symbol of how innovation works across the decades, for those future founders who are studying the IPO experiments of unicorns today.

The company is a high-flying unicorn with a practical purpose from serial entrepreneur Max Levchin, who has also helped shape the concept of the modern startup — from cofounding Paypal and making numerous angel investments over the years, to Slide, a profitless, highly valued consumer tech company in San Francisco a decade ago. It’s not widely understood outside of tech, Slide and other social media companies helped pioneer the growth and engagement techniques that subsequent startups applied across SaaS, e-commerce, fintech and real-world sectors. Today, Root and Affirm and many of the other companies in this era of IPOs are standing on the lessons of those years.

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SPAC growing pains

Special Purpose Acquisition Companies are sure to provide valuable lessons, as a growing group of startups use these investment vehicles to ease into public markets. Here’s the latest look at the action, starting with this disturbing quote that Connie Loizos got from one expert this week.

According to Kristi Marvin, a former investment banker who now runs the data site SPACInsider, she’s having, and hearing about, conversations with a much wider range of people interested in launching SPACs than in past years — and not all of them are necessarily equipped to manage the vehicles.

“You ask, ‘Have you ever acquired a company for $500 million or more? Do you have operating experience in the vertical that you’re targeting? Do you understand the reporting requirements involved?’ Often,” she says, “the answers are no.”

That was in the context of a controversial former Uber executive starting a SPAC; Connie also looked at gender representation in this emerging slice of high finance. Like other parts of that world, the people involve are almost entirely men (which is also continuing to be the case in startup funding, actually, Alex reports).

Meanwhile, Catherine Shu examined how troubled electric vehicle startup Faraday Futures is approaching SPAC plans, while Alex took a closer look at the challenges and opportunities facing Opendoor.

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Public investors stay in love with tech, as Root and Affirm file to IPO

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