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Pandemic tech bubbles echo those of the dotcom era

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Do you remember when $100bn was a lot of money? Twenty years ago, at the height of the dotcom bubble, that was how much was poured into venture capital investments in a single year. It was five times the amount seen two years before, and five times as much as two years later.

It turned out that much cash could not be forced into start-ups without a business model, and most of the money was lost. Another $42bn went into tech initial public offerings. Many of these were from revenue-less companies that would not have had a hope of making it to the public markets in normal times.

Compare that with what has now become a series of bubbles in and around the tech industry. These have found different forms in the likes of IPOs, initial coin offerings, Bitcoin and Tesla. But it is not hard to find the common denominators: The hunt for growth in an investment world awash with cash, and the kind of fear of missing out — or “fomo” — that takes hold at such times.

One clear echo of the dotcom bubble has come from the rise of the special purpose acquisition companies, or Spacs. The companies raise funds and then go in search of acquisitions. As in the dotcom era, much of the Spac money is finding its way into early-stage ventures, making this the first time since the start of the century that a channel has opened up to take a larger number of revenue-less companies to the public markets. “Auto-tech” start-ups are a particular favourite.

Nikola, which came to market after an acquisition by a Spac, has been the starkest example. The hydrogen-powered truck company had losses of $117m in the latest quarter and no revenues. Yet it rose to a market value of $25bn in the middle of last year. And despite the resignation of its chief executive and General Motors’ decision to scrap a planned $2bn partnership with the company, it is still valued at more than $6bn.

The race to raise cash last year has left Spacs with $70bn of firepower, according to Goldman Sachs. Given the way they structure their deals, that equates to future acquisitions worth $300bn. If the deals are not all crammed into the next two years, then that money has to be handed back to investors, creating classic incentives for a bubble.

There are other parallels with the dotcom period. In promising new tech markets, it is common for a winner-take-all mentality to take hold, points out Charles Giancarlo, a veteran Silicon Valley executive. Investors fail to imagine how competition will develop. The cloud software industry — where companies like Zoom have thrived — is full of supposed “category killers”, companies with a specialised service expected to dominate a global niche. The index of “emerging” cloud software companies on Nasdaq has risen around 150 per cent from its low point at the start of the pandemic, valuing the companies at $1.8tn.

Behind all this is the sheer weight of money looking for a home. The public markets offer few growth opportunities. The traditional venture capital industry cannot handle the weight of money, leading to a rash of experimentation in recent years. This included sales of digital tokens, or ICOs, made by cryptocurrency projects. These crowd-fundings by classic revenue-less software start-ups pulled in $20bn.

IPO investors have also made a belated bid to join the party. Going public fell out of fashion for an entire generation of tech start-ups. But the initial share price spikes at DoorDash and Airbnb last month show that the IPO speculators are back out in force.

To avoid the mania, gaming company Roblox has just scrapped its IPO for a quieter backdoor route to the market through a direct listing. But it still raised some extra cash in a deal that valued it at $29.5bn, or seven times what it was judged to be worth in a fundraising less than a year ago.

Much like squeezing a balloon full of water, the excess cash in the system is causing bulges that are becoming impossible to suppress. Consider two that have transfixed speculators.

The market value of all outstanding bitcoin has risen $580bn since the start of last year, hitting a new record this week of more than $700bn. That closely matches the trajectory of Tesla: the electric car maker has added $670bn in market cap in the same period, and is now valued at $750bn.

Tesla may one day dominate a global electric car market, and bitcoin may become a permanent fixture in the world of digital money. But as each soars towards $1tn, they look like the clearest examples of the pandemic era’s spreading financial bubbles.

richard.waters@ft.com



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Deliveroo picks London for IPO after listings review

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Deliveroo has chosen London for its highly anticipated initial public offering after Rishi Sunak, the UK chancellor, endorsed an overhaul of listing rules to allow founders to retain more control after going public. 

The multibillion-pound IPO is expected to be among London’s largest this year, handing the City a much-needed win over New York and Amsterdam at a time of feverish activity in new tech listings. 

“Deliveroo is proud to be a British company, and the selection of London as its home for any future listing reflects Deliveroo’s continued commitment to the UK,” said Claudia Arney, Deliveroo’s chair. 

Deliveroo’s decision follows the publication on Wednesday of a review by Lord Jonathan Hill, former EU financial services commissioner, which recommended a wide range of reforms to loosen listing rules in the UK. 

Among Hill’s recommendations were proposals to allow dual-class share structures, which allow founders to hold on to extra voting rights after an IPO, to be used by companies trading on the London Stock Exchange’s “premium” segment. The dual-class arrangement is popular in Silicon Valley, where it is used by companies including Facebook and Google parent Alphabet. 

The move, which Sunak endorsed during Wednesday’s Budget, was designed to attract fast-growing tech companies such as Deliveroo, though some London fund managers fear the change puts shareholder protection at risk.

Deliveroo said in a statement on Thursday morning that its dual-class structure would be “closely in line” with the Hill review’s recommendations and be limited to three years. However, the changes are unlikely to come into force before it has completed its IPO, with initial paperwork expected to be filed as soon as next week.

Companies with dual-class structures can already trade on the LSE’s standard listing. Once the new rules are in place, Deliveroo would be able to move up to a premium listing. A person close to the company said that the Hill review was also likely to attract more tech companies to London, making it more attractive as a listing venue overall.

“Alongside the dual-class share structure, Deliveroo intends to have a strong commitment to corporate governance standards including a majority independent board of directors as well as upholding diversity standards,” the company said. 

Will Shu, Deliveroo’s co-founder and chief executive, said he was “proud and excited” to list in London, where the company first began making restaurant deliveries in 2013. 

Sunak hailed the decision as “fantastic”. 

“Deliveroo has created thousands of jobs and is a true British tech success story,” he said in a statement. “It is great news that the next stage of their growth will be on the public markets in the UK.”

Arney added: “London is not just where Deliveroo was born, it is one of the leading capital markets in the world, with an incredible technology ecosystem, sophisticated investment community and a skilled talent pool. The time-limited dual-class structure would provide Will and his team with the certainty needed to execute against their ambitious growth plan to become the definitive online food company.”



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Investors push back against UK listings overhaul

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London’s biggest fund managers have pushed back against proposals to liberalise the City’s stock market listings regime, saying changes aimed at luring in technology businesses and special purpose acquisition companies risk “watering down” investor protections.

A report by Lord Jonathan Hill, published on Wednesday, recommended allowing dual-class share structures for companies admitted to the London Stock Exchange’s “premium” segment, and lowering the limit on the free float of shares in public hands from 25 per cent to 15 per cent, meaning founders need to sell less of their business to list it. He also laid out proposals to make the UK a stronger potential venue for listings of blank-cheque companies known as Spacs.

UK companies and the country’s main listings venues, the LSE and Aquis Exchange, said the plans were vital to improving London’s attractions in a globally competitive market. But some investors are nervous.

Chris Cummings, chief executive of the Investment Association, the trade body that represents asset managers with a total of £8.5tn in assets, said the proposals were an “important first step”, but he warned that the UK needed to ensure “appropriate investor protections for minority shareholders”.

One large investor in UK-listed companies said it was strongly opposed “to the watering down of rules governing premium listing”. “Shareholder protections should not be used as a bargaining chip to prove the UK is open for business,” the investor said.

Another large global asset manager said the current standards for premium listings, including the principle of “one share, one vote”, were “critical”.

“The UK has gold standards for stewardship,” the fund manager said. “If we are going to create more flexibility for a listing, we would want over time [for companies to] work towards a premium listing with ‘one share, one vote’ and standard free float with sufficient liquidity.”

Some asset managers took a more upbeat view of the Hill review.

“Schroders is in full support of Lord Hill’s review. It is crucial that we do all we can to make the UK the most attractive place for companies to list and to do business for the benefit of investors,” said Peter Harrison, chief executive at Schroders, the biggest listed UK fund manager.

Hill’s proposals are intended to boost London’s global standing as an equity market, which has weakened in recent years as the US and Hong Kong have swept up the majority of in-demand tech listings. New York’s markets have also gained a boost from a wave of Spacs, which raise money from investors and list on a stock market, then look for an acquisition target to take public.

The departure of some large technology stocks such as Arm in recent years has cemented the blue-chip FTSE 100 index’s bias towards financials, energy and mining stocks. A loss of trading businesses to European rivals since Brexit has also further dulled the allure of the City.

The Hill recommendations are “smart, pragmatic measures”, added Sir Martin Sorrell, whose S4Capital digital market and advertising business has a dual-class share structure. “[It] also signals that the government’s ‘Singapore on Thames’ vision for a post-Brexit Britain is on the way to becoming a reality,” he said.

Makram Azar, chief executive of Golden Falcon, the European technology blank cheque company that opted to list in New York, said London needed to make significant structural changes.

“The recommendations will no doubt spur investors to look at listings on the LSE in the future. It will take time to develop the whole ecosystem around Spac listings in London, but this is the start of the sea change that’s needed.”

Others cautioned against the risks of making changes to attract blank cheque companies.

“Spac deals may be booming in the USA right now, but fear of missing out is just about the worst possible reason for making any investment decision,” said Russ Mould, investment director at stockbroker AJ Bell. “It is therefore to be hoped that the FCA maintains its critical faculties when it assesses Lord Hill’s proposals and the safeguards that he offers alongside them.”



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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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