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Airbnb and DoorDash IPOs leave gig economy issues unresolved

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The gig economy — aka the sharing economy — has been one of the most important online phenomena of the decade. This week it also made a loud splash on Wall Street, as the stock market listings of delivery company DoorDash and home rental company Airbnb met a euphoric reception.

But for a sector that is already getting long in the tooth, there are a surprising number of unresolved questions. Of particular interest this week: Are these good businesses? And, as their sometimes deleterious impact on society prompts a backlash, will they make good businesses in future?

This is an important transitional moment. Following last year’s initial public offerings of ride-hailing companies Uber and Lyft, the main exemplars of this new style of online marketplace are now on the public markets.

It’s hard to argue with the gig economy’s impact. In the year before they went public, the four companies generated more than $100bn worth of rides, deliveries and home rentals between them (though some bookings have fallen back during the pandemic).

Using apps to organise informal markets has undoubtedly resulted in important new forms of competition and unleashed extra resources in the economy. That includes giving more people scope to participate in a part-time labour force (this is the “gig” part of it) and extending the use of assets like private cars and homes (the “sharing” part).

But that has not translated into profits. Even the flattering financial metric these companies prefer to be judged by — adjusted earnings before interest, taxes, depreciation and amortisation — showed all four to be lossmaking in the 12 months leading up to their listings, with some $3.3bn in red ink between them.

So are their business models half-baked, or just half-evolved?

While Airbnb has a solid gross margin above 80 per cent, the pre-IPO range of 45-57 per cent for the other three shows how much their supposedly “lightweight” marketplace models are weighed down with the costs of trying to generate demand.

These include the subsidies that have been lavished on consumers during vicious battles for market share. This may not have generated clear financial returns for shareholders, but it has undoubtedly generated consumer benefits. For many people, getting a ride whenever you want or ordering a meal from a smartphone are now just part of everyday life.

Regulation will undoubtedly increase costs further and limit the companies’ room for manoeuvre. The benefits of labour market arbitrage — paying lower costs for informal workers — are likely to erode as the political heat intensifies. Meanwhile, city authorities are starting to realise that it may not be in their residents’ best interests if the streets are full of empty ride-share cars, apartments are unavailable for rent to local workers, and restaurants close down because of excessive fees charged by delivery companies.

The stock market has a way of exerting discipline. Even if the current euphoria rewards profitless IPO candidates, the pressure will build to hone their business models. Uber’s stock price has more than tripled since its low point in March but it is still not above making sensible financial decisions. This week, it gave up on its expensive in-house attempts to develop autonomous driving and flying cars.

There are two obvious avenues to get to profitability. Consolidation has already swept through the ride-sharing and delivery apps, and there is more to come. Survivors will be in a better position to raise prices.

The other avenue is to exercise their power as intermediaries to squeeze more for themselves out of the value chain. The history of the internet has been one of ceaseless disintermediation and reintermediation. That is, of newcomers cutting out old businesses to supposedly “free” consumers, before inserting themselves as the new bottlenecks. As they aggregate consumer orders, mobile apps are starting to find themselves in a powerful position.

This may not be a welcome development for some providers of services that are being sucked into the gig economy’s orbit. Restaurants, for example, have come to rely on online ordering and deliveries during the pandemic. But if a handful of apps comes to represent a significant share of their sales — and if those apps have the power to redirect customers to other meal providers offering better terms — the results could be painful.

For investors in the newly public gig sector, it looks like being a work in progress for some time to come.

richard.waters@ft.com



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IPOs / FFOs

Deliveroo: taste test

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Much depends for the London-based company on whether enthusiasm for home deliveries formed during the pandemic wanes



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Instacart valued at $39bn in funding round ahead of IPO

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Grocery delivery app Instacart has raised $265m from its existing investors, doubling the company’s valuation following the pandemic boom in demand.

Instacart, the US market leader in the grocery app sector, said the round valued the company at $39bn, up from $17.8bn at the time of its previous fundraise, which closed in November last year.

The company said it intended to use the money to increase its corporate headcount by about 50 per cent this year, a hiring spree that would be spread across the business.

The cash injection comes as the company lays the groundwork for a long-anticipated initial public offering. In January, it announced it had hired Goldman Sachs banker Nick Giovanni as its new chief financial officer. Giovanni had previously been involved in IPOs from Airbnb and Twitter.

“This past year ushered in a new normal, changing the way people shop for groceries and goods,” Giovanni said in a statement announcing the latest round.

“While grocery is the world’s largest retail category, with annual spend of $1.3tn in North America alone, it’s still in the early stages of its digital transformation.”

The company declined to comment on its timetable for going public.

Last week, Instacart added its first independent board members — Facebook executive Fidji Simo, and Barry McCarthy, a former finance chief of streaming platforms Spotify and Netflix.

Notably, McCarthy was the architect of Spotify’s 2018 direct listing, a process by which a company goes public without creating any new shares.

Over the past year, Instacart has been a key beneficiary of lockdown conditions, with many physical retailers restricting walk-in access to stores.

To accommodate the demand, Instacart’s gig workforce has swollen to more than 500,000 across the country. Over the course of 2020, the company said it added more than 200 retailers and 15,000 additional locations to its app.

However, the company faces growing competition from other delivery apps — such as Uber — and other online grocery offerings from retailers such as Walmart and Amazon.

And, as pandemic conditions subside, interest in online grocery shopping may tail off, suggested Neil Saunders, a GlobalData analyst. He also warned that Instacart is at risk of being forced out by grocery stores once they have their own ecommerce strategies more firmly in place.

“Paradoxically, the drive online has actually made retailers a lot more interested in investing in their own systems,” Saunders said. “If retailers decide to go it alone, it leaves Instacart out in the cold.”

The company said it would use the latest funding to increase its investment in its fledgling advertising business, as well as Instacart Enterprise, its “white label” service for companies that want to use Instacart’s logistics with their own branding.

The round was led by Andreessen Horowitz, Sequoia Capital, D1 Capital, Fidelity, and T Rowe Price.



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UK listing rules set for overhaul in dash to catch Spacs wave

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A Treasury-backed review of the City has called for an overhaul of company listing rules so London can better compete against rivals in New York and Europe and grab a share of the booming market for special purchase acquisition vehicles.

The review, to be published on Wednesday, also proposes allowing dual-class shares to give founders greater control of their businesses and attract a wave of tech companies to the London market.

The City’s attractiveness has stumbled in recent years as the US and Hong Kong have swept up the majority of in-demand tech listings. New York’s markets have been further swelled this year by a surge of so-called Spacs, which raise money from investors and list on a stock market, then look for an acquisition target to take public. Britain’s edge also has been eroded by a loss of trading businesses to European rivals since Brexit.

Rishi Sunak, chancellor, who commissioned the independent report, said the government was determined to enhance the UK’s reputation after leaving the EU, “making sure we continue to lead the world in providing open, dynamic capital markets for existing and innovative companies alike”.

The review, which was carried out by Lord Jonathan Hill, former EU financial services commissioner, has recommended a wide range of reforms to loosen rules that have tightly governed listings in the UK.

Lord Hill has recommended lowering the limit on the free float of shares in public hands to 15 per cent — meaning founders need to sell fewer shares to list — and wants to “empower retail investors” by helping them participate in capital raisings. 

He has also proposed a “complete rethink” of company prospectuses to cut regulation and encourage capital raising, and suggested rebranding the LSE’s standard listing segment to increase its appeal. The chancellor should also produce an annual “State of the City” report.

The government said it would examine the recommendations — many of which require consultations by the Financial Conduct Authority.

Lord Hill also recommended that the FCA be charged with maintaining the UK’s attractiveness as a place to do business as a regulatory objective. 

The FCA said it aimed to publish a consultation paper by the summer, with new rules expected by late 2021. 

Lord Hill said the proposals were designed to “encourage investment in UK businesses [and] support the development of innovative growth sectors such as tech and life sciences”.

He said the UK should use its post-Brexit ability to set its own rules “to move faster, more flexibly and in a more targeted way”, in particular for growth sectors such as fintech and green finance.

However, the recommendations will cause concern among some institutional investors which have argued that loosening rules around dual-class shares, for example, will risk lowering corporate governance standards. 

The review said London needed to maintain high standards of governance, with various ways recommended to mitigate risk. On dual shares, for example, it recommended safeguards such as a five-year limit.

Amid fears that the government could go too far with a drive for deregulation, Lord Hill said his proposals were “not about opening a gap between us and other global centres by proposing radical new departures to try to seize a competitive advantage . . . they are about closing a gap which has already opened up”.

Other recommendations include making it easier for companies to provide forward-looking guidance when raising capital by amending the liability regime, and improving the efficiency of the listing process. 

The inclusion of a recommendation to help Spacs list in London by no longer suspending shares after a target is picked will be welcomed by many investors.

However, the rapid growth of such vehicles loaded with billions of dollars in speculative cash has also raised concerns about a bubble forming in the market.

Lord Hill said there was a risk that the UK was losing out on “homegrown and strategically significant companies coming to market in London” from overseas Spacs.

The UK has lagged behind New York and Hong Kong in attracting the types of companies from sectors, such as technology and life sciences, that dominate modern economies and attract investors seeking growth stocks. 

London accounted for only 5 per cent of IPOs globally over the past five years, while the number of listed companies in the UK has fallen by about 40 per cent since 2008. The review also pointed out the most significant companies listed in London were either financial or representative of the “old economy” rather than the “companies of the future”. 

Lord Hill referred to the flow of post-Brexit business to Amsterdam to make the point that the UK faced “stiff competition as a financial centre not just from the US and Asia, but from elsewhere in Europe”.

The steps represent a win for the London Stock Exchange Group, whose chief executive David Schwimmer has called for a more competitive listing regime. He said it was possible to strike a balance between being competitive and maintaining high corporate governance standards.



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