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Lex Midweek Letter: rite stuff from Airbnb and DoorDash

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Dear readers,

When a US tech unicorn’s fancy turns to thoughts of public markets it must make an S1 filing. Two of the biggest start-ups in the US, Airbnb and DoorDash, have undergone that rite of passage in the past week.

For outsiders such as journalists and investors, this is cause for celebration. An S1 is a form that companies file with the US Securities and Exchange Commission before they list. The idea is to give investors and the SEC a clear look at the pre-IPO business. All the questions that a start-up founder has previously evaded need to be answered publicly. Mad growth metrics, grandiose claims about changing the world and knotty problems are published for all to see. 

In its simplest form, an S1 will give a summary of the business, how much it wants to raise (although this can change at a later date), what the money will be spent on and how the business is doing. But each one is special in its own way.

Sometimes an S1 can be a full-blown horror show. Eccentric office rental company WeWork showed that the company was in an even more alarming state than its critics had realised when it published its S1 last year. Full-year net losses of $1.9bn had built up alongside $47bn of lease obligations and plans to elevate the world’s consciousness. That was before the revelation of an outlandish $5.9m payment to founder Adam Neumann for the word “We”.

The timing of S1s from Airbnb and DoorDash makes sense. Room rental company Airbnb’s initial public offering comes quick on the heels of news of two effective vaccines against Covid-19. Holidays and business trips could be back on next year. Food delivery app DoorDash’s listing follows months of lockdown in which bored households have ordered more takeaways than ever before.

Airbnb, which has raised more than $6bn as a private company, is the most anticipated tech IPO this year. Its S1 is notable for saying the word “community” a lot. More than 150 times, in fact. The pattern of net losses it reveals is peculiar too — from $135m in 2015, $147m in 2016, $70m in 2017, $17m in 2018 and then back up to $674m in 2019. Airbnb says this was driven by “significant investments” in upgrading its technology. But investors should keep an eye out to make sure this was a one-off. 

The document also shows just how devastating the effects of the pandemic have been on the travel industry. Total revenue fell almost a third in the first nine months of 2020 compared with the same period last year. Net losses doubled to almost $700m. One interesting point: Airbnb says it was able to keep up bookings even as it reduced advertising spend, with 91 per cent of traffic arriving via direct or unpaid channels. This bodes well for keeping a lid on future costs.

DoorDash’s S1 is also full of feel-good words about communities. Chief executive Tony Xu writes that “fighting for the underdog is part of who I am and what we stand for as a company . . . DoorDash has always been about helping local businesses succeed”. Others might disagree, including restaurants unhappy about the cut DoorDash takes and freelance drivers who would prefer to be treated as employees.

The document also shows that the effects of the pandemic were outsize, although for DoorDash the change was positive. In the first nine months of 2020, customers spent $16bn. This provided DoorDash with revenue of $1.9bn — up more than 220 per cent on the previous year. 

But, as with any S1, the list of risks are where the real fun lies. Airbnb admits it may never be profitable and continues to fight with regulators. Over at DoorDash, the company has “identified a material weakness in our internal control over financial reporting”. In a sector not known for its humility, it is always nice to get a dose of cold, hard reality.

Enjoy the rest of your week (and any S1s you happen to read).

Elaine Moore
Deputy head of Lex 



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Oscar Health raises $1.4bn from stock market listing

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Oscar Health, the health insurance company co-founded by Joshua Kushner, raised more than $1bn in an initial public offering that topped the company’s marketed price range, in a sign of investor confidence despite political uncertainty over the future of US healthcare.

The New York-based company priced its shares at $39 each on Tuesday, according to a statement, raising about $1.4bn. Oscar would have a market capitalisation of $7.9bn at that price, based on the total number of shares outstanding.

Oscar previously said it expected its listing share price to range from $32-$34 before increasing the range to $36-$38 on Tuesday. Coatue Management, Dragoneer Investment Group and Tiger Global Management — existing investors in the company — had indicated interest in purchasing up to $375m of shares in the offering.

The move demonstrated that investors are relatively unfazed by potential headwinds for the company. President Joe Biden has vowed to reform the US healthcare system and the Supreme Court is considering a decision on the fate of the Affordable Care Act, known as Obamacare, both of which could pose significant challenges to Oscar’s operating model.

Oscar was co-founded in 2012 by Mario Schlosser and Joshua Kushner, the brother of Jared Kushner, Donald Trump’s son-in-law. Kushner’s venture firm, Thrive Capital, owned a stake that would be worth $1.3bn at the offering price and give it 75.9 per cent of the company’s voting power.

Oscar, which bills itself as the first health insurance company “built around a full stack technology platform”, has more than half a million paying members and offers its insurance plans in 18 US states.

But the company has struggled to become profitable. In 2020, it recorded widening losses of more than $400m on revenues of about $460m, a decline from almost $490m of revenues the previous year.

Oscar’s IPO came on the heels of several other public market debuts for “insurtech” groups in the past year, which fuelled an already strong run of stock market listings.

Clover Health, which uses data analytics to connect senior citizens to Medicare Advantage plans, merged with a special purpose acquisition company, or Spac, sponsored by former Facebook executive Chamath Palihapitiya in a $3.75bn deal in October. Lemonade, which sells rental, homeowners and pet health insurance, went public last summer in what turned out to be one of the year’s most successful stock market debuts.

Oscar is highly sensitive to any changes to Obamacare, which lawmakers have wrestled over since it was written into law in 2010. Almost all of the company’s revenue comes from plans subject to Affordable Care Act regulations, according to its prospectus.

President Joe Biden’s healthcare programme would leave Obamacare largely intact, but would make some adjustments and add a public option for all Americans. The Supreme Court, meanwhile, is expected to announce a decision on yet another review of the Affordable Care Act in the coming months.

Goldman Sachs, Morgan Stanley and Allen & Co led the offering.



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Spac led by tech founders targets Europe’s unicorns for US listings

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Tailwind International, the New York-listed special purpose acquisition company, is searching for European tech unicorns to list in the US as part of plans to bypass EU and UK markets and build a multibillion-dollar franchise of Europe-based businesses.

Tailwind, which says it is the first Spac where a group of European tech founders will focus on investing in the region’s tech companies, raised $345m on the New York Stock Exchange last month with the intention of taking a European tech group public in the US. 

Tommy Stadlen, co-founder of venture capital fund Giant and the Spac’s chair, said: “We will bring one of Europe’s iconic technology companies to the US public markets.”

Pierre Denis, former Jimmy Choo chief executive and Coty board member, is the chief executive. Nathalie Gaveau, co-founder of French ecommerce site PriceMinister, is president and other sponsors include the co-founders of luxury online retailer MatchesFashion and German meal kit delivery business HelloFresh.

Philip Krim, the co-founder of online mattress start-up Casper, is a co-founder.

The number of Spacs — which list on the stock exchange before they find a business to buy — has grown rapidly in the US in the past few months as investors have piled in with the hope of acquiring stakes in promising target businesses.

In February alone a total of 174 Spacs filed or priced for expected gross proceeds of $56bn, according to data from FactSet.

So far this year, there have been more than 180 Spac filings, against last year’s total of nearly 250, which was the highest in five years.

European tech groups, including the UK’s used car site Cazoo and health app Babylon, have already held talks with US Spacs

The Tailwind team is planning to launch a series of Spacs to build out the franchise. The minimum size of any target would be $1bn, Stadlen said, ranging up to $15bn, with the potential to raise additional equity.

He said the UK would be a focus owing to the larger numbers of promising tech companies, alongside France, Germany and the Nordic nations.

In a sign of booming demand among investors, Tailwind increased the size of the listing from $250m to the maximum of $300m, and also exercised the “greenshoe option” that allowed its underwriters to buy up further shares, taking the total to $345m. People close to the process said there was $3bn of demand for the initial public offering. 

Stadlen said Tailwind would have an advantage in being run by tech founders — pointing out that operator-led Spacs outperformed peers — and that a “multi-Spac” platform was more likely to succeed because of access to resources.

Tailwind has already had conversations with European venture capital firms and founders to discuss potential US listings of their businesses, he said.

He added that European exchanges had been unattractive to tech listings because they offered lower potential returns. Only two have listed in Europe so far this year, according to Refinitiv. A US Spac offers founders access to US markets where there were “more capital and better valuations”. 

Bankers in London are keen for the UK government to change the listing rules on Spacs to compete with New York and rival cities in Europe. At present, a Spac acquisition in the UK is considered a reverse takeover and the shares are suspended. Trading cannot resume until a deal prospectus is published, for which there is no specified deadline, so investors who want to sell their shares can find themselves locked in.

Bankers in London have talked up Amsterdam as Europe’s hub for Spacs, while German venture capitalist Klaus Hommels launched a European tech-focused Spac, Lakestar, in Frankfurt last week, the first on the Xetra market in a decade.

“We are open to Spacs as a product and have all the conditions in place for more of these to go public in Germany. They have been the go-to topic in most calls with issuers, banks, and lawyers over the past six months so we expect Spac listings to accelerate in Europe,” said Renata Bandov, head of capital markets at Deutsche Börse.

“In the post-Brexit environment, UK-listed companies cannot currently passport their prospectuses into the EU so we anticipate a higher influx of dual listings.”



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Rocket Lab/Spire Global: Spacs, the final frontier

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Life sometimes imitates emojis. Social media stock tipsters are fond of littering posts with rocket symbols. Rocket Lab, which is floating at a $4.1bn enterprise value, makes the real thing. It was one of two space-related businesses to join the market via special purpose acquisition companies (Spac) on Monday, as the surge in these listings continued.

Just two months into the new year and Wall Street has raised a staggering $58bn through 188 blank cheque vehicles, according to Refinitiv. With hot money appearing to outweigh the supply of merger candidates, sponsors are howling to the moon for deals.

Rocket Lab launches smaller satellites into space. Its celestial twin was Spire Global, a satellite data group that is combining with a Spac at a $1.6bn equity valuation.

Like many recent Spac companies, Rocket Lab and Spire are justifying their valuations with lofty sales and earnings growth projections. Rocket Lab, which generated $35m in revenues last year, said it expected to pull in more than $1.1bn in 2026 and become cash flow positive in 2024. Spire, with just $28m in sales in 2020, is forecasting $900m in revenue by 2025 and positive cash flow in three years’ time.

Tesla founder Elon Musk and his SpaceX rocket company have reignited investor interest in US space companies. Annual revenues from space-related business — at present worth $350bn — could almost triple in size by 2040, according to Morgan Stanley.

SpaceX was reportedly valued at $74bn by its latest private funding. Shares in Virgin Galactic, Richard Branson’s space tourism company, have almost doubled since last September to give it a $9bn valuation, even as the group reported a $273m loss in 2020.

Space companies are a moonshot borne aloft by the rocket fuel of cheap money. That momentum trade has more to recommend than some others, such as fledgling electric vehicle companies. Both Rocket Lab and Spire have proven technologies to accomplish highly demanding tasks. This really is rocket science. But like space exploration itself, these investments are only for the brave.

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