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Made.com’s first-day flop is another case of pandemic IPO opportunism

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It will be no surprise to its customers that Made.com’s prospectus arrived late and left a lot to unpack.

Shares in the self-assembly furniture retailer had been trading for more than five hours by the time the public were given a chance to examine the business in detail. An 8 per cent drop from the issue price, which at 200p apiece was at the very bottom of the indicative range, had already suggested some institutional jitters about what they had bought.

And no wonder. Made.com somehow contrived to lose £1.8m in the first three months of 2021.

The prospectus blurb leans heavily on how its model of taking orders before paying suppliers delivers superior cash flow. Yet even the pandemic-fuelled home improvement boom has not been enough to prove a business that in its 11th year of operation has yet to turn an annual profit.

Made.com’s handlers blamed the flop on IPO fatigue. It’s a weak excuse. Dealogic data show that the year to date has been quieter than average for London market floats and, while Deliveroo and Alphawave were both well publicised disasters, plenty of new issues including Moonpig, Trustpilot and Darktrace have headed northwards.

Made.com’s bigger problem is that it is an old-economy play from a sector whose fortunes remain tied to housing transaction volumes and supply chain management.

Furniture is notoriously difficult to sell profitably. Only Ikea has built a global presence in a fragmented market that remains hemmed in by national borders. Swapping a store fleet for a website does not fix inherent fragility of scale and seasonality that pushed companies including MFI, Habitat and ScS Upholstery into administration in 2008 when their suppliers pulled credit insurance.

Success stories since have mostly been marketplaces such as Wayfair, the $33bn-valued sector gorilla. It plugs 22m products from more than 16,000 suppliers into a distribution network that is built to handle the kind of bulky and unwieldy parcels that are a hindrance to its rivals’ delivery times.

Breadth and speed matter because pricing power is weak and customer switching costs are nil. Marketplaces live in fear of Amazon, whose pages are already filled with no-brand Chinese knock-offs, so they try for scale by throwing money at marketing. Wayfair has spent an average of 11 per cent of sales on advertising over the past five years, outspending its bricks-and-mortar rivals approximately fourfold.

The idea behind Made.com and its closest European peer, Frankfurt-listed Westwing, is to offer something more differentiated: a private-label collection in a magazine format that takes cues from Terence Conran. It is a niche helped out over the past year by a drop in marketing expenses as leisure industry closures diverted disposable income to homewares.

Benefits now look to be unwinding — Made.com’s administrative expenses before flotation costs rose 14 per cent year on year in the first quarter — and the formula is unproved in normal times. Westwing warned repeatedly throughout 2019 that ad spending was not boosting sales and entered the pandemic trading below cash value, having slumped more than 90 per cent from its float price in 2018.

Then there is what Made.com calls its “innovative, data led just-in-time supply chain”. It is also unproved. Recent freight line disruption meant lead times were up to eight weeks behind target levels, which pushed the recognition of about £8m of operating earnings from 2020 to 2021. Customers were already being asked to wait up to 16 weeks for delivery and can cancel free of charge at any time. Their requirement for patience has become a meme.

Brent Hoberman, Made.com’s co founder and highest-profile backer, marked the top of the dotcom bubble perfectly in 2000 with the IPO of Lastminute.com. With Made.com his exit was much earlier, coming as part of a refinancing in 2015 that culled most of the board. Taking the company public cuts Hoberman’s remaining stake from 7 per cent to less than 5.5 per cent.

That fellow backers chose this moment to sell down leaves the unavoidable feeling that the market is being delivered less than it bargained for.





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IPOs / FFOs

Robinhood push to democratise finance falters with own shares

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Robinhood updates

Robinhood has had a pretty clear pitch as it has taken on Wall Street’s traditional brokerages with its trading app — democratise finance for all.

That slogan hearkens back to the origins of the company in 2013 in the wake of the Occupy Wall Street protest movement, which railed against wealth inequality and the power of big banks.

Robinhood’s co-founders said they saw a need to disrupt the established, elitist financial system and make equity markets more accessible to everyday investors.

That pitch — reinforced with branding that played on the original Robin Hood ideal of stealing from the rich to give back to the poor — helped make the company the brokerage of choice for many new, young investors piling into equity markets since the start of the pandemic.

But in making its $32bn initial public offering this week, corporate governance activists believe the upstart company has not lived up to the democratic ideals of its mission statement.

Robinhood offered up to 35 per cent of its shares to its own customers, offering access for retail investors to a part of the market traditionally reserved for large investment institutions. It allocated the shares itself, bypassing traditional Wall Street banks by using the new IPO access feature on its app.

However, it has eschewed what corporate governance experts believe is the gold standard for shareholder structures of one share, one vote.

Not all Robinhood shares are created equal. Its co-founders will retain an extraordinary level of control over their company after it goes public. Robinhood’s dual class structure means the shares sold to retail investors and institutions carry one vote, while the shares held by its co-founders Vlad Tenev and Baiju Bhatt carry 10 votes per share. 

The former high-frequency traders will own approximately 16 per cent of the company’s shares (7.9 per cent each), yet control 65 per cent of the votes, with Tenev holding 26.2 per cent and Bhatt holding 39 per cent, according to the company’s prospectus.

Dennis Kelleher, the chief executive of Better Markets, a financial reform advocacy group, said it was not clear that retail investors understand that “the owners of Robinhood are rigging share ownership in their favour”.

“Robinhood should tell retail traders that its shares available to them are in fact impaired shares that are always going to be less valuable than the shares of people running Robinhood for their own benefit,” he said.

Some 85 per cent of companies in America that went public in 2020 used one share one vote structures according to data from the Council of Institutional Investors, a corporate governance advocacy body. However, many higher profile companies — particularly in the tech sector — have more power over their investors to push through dual-class structures.

When ride-hailing service Lyft went public, for example, its co-founders owned just 5 per cent of the stock but held on to 49 per cent of the votes using a 20 to 1 dual share structure. In some companies, the extra voting rights even extend to the afterlife. Pinterest founder Ben Silbermann was also issued shares that gave him 20 times the number of votes of common stock shareholders, a privilege that gave him voting rights for up to 540 days after his death.

If the company actually succeeds, the shareholder power imbalance will widen. Tenev and Bhatt’s voting share rises if the share price hits certain price targets. If they receive their maximum agreed compensation including shares, the co-founders’ voting rights would represent more than 75 per cent of total shareholder votes in the company, according to the company’s prospectus. 

IPO investors raised concerns about the dual class structure, and the unusual amount of power it gave both Tenev and his increasingly silent partner Bhatt. Both have been dealing with numerous regulatory interventions as a result of their “move fast and break things” approach to Robinhood’s early growth. 

One large money manager who declined to invest in the IPO said: “You have no power over the management team if you want to get rid of them, and that is something to worry about.”

Premium valuations placed on hot companies with dual voting class structures in IPOs also tend to dissipate in subsequent years, according to research from the European Corporate Governance Institute on US companies from 1980-2017.

David Erickson, a lecturer at the University of Pennsylvania’s Wharton business school and former IPO banker, said it was not uncommon in recent years for tech companies over the last few years to have a dual-class voting structure. But he said it was odd to have one if a company was claiming to democratise investing.

“One share one vote is how you democratise investing,” he said.

madison.darbyshire@ft.com



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Duolingo: threatened by free riders — and electronic Babel fish

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Technology sector updates

Welcome to Duolingo! Congratulations for signing up to the world’s largest language app. Your chosen tongue is start-up-ese.

Exercise Onespot the dissonant word or phrase on this list: fast growth; large losses; initial public offering; Pittsburgh.

Duolingo’s Pennsylvania HQ makes it an outlier. But it has not stopped the edtech company from joining the US listing rush. Shares ended the first day of trading up 36 per cent. Duolingo’s near $5bn market value is double its last private valuation and a huge 31 times trailing revenues.

To justify that, the business will need to turn a lot of free users into paying customers. Just 4.5 per cent of users pay at present.

The lossmaking company promises users they can master one of 40 languages by practising for a few minutes each day. Gaming-style tasks make courses addictive. Common content means overheads are low. Cost of revenue accounted for 28 per cent of the top line last year.

A pandemic boost nearly doubled revenues in the last quarter, up 97 per cent on the same period the year before to $55m. Duolingo’s freemium model aims to make money in three ways: adverts, a $12.99 monthly premium subscription to avoid them and a $49.99 English language certification. Subscriptions account for nearly three-quarters of sales.

Spotify is the most compelling recent example of freemium success. It took 13 years to become profitable. So Duolingo’s $13.5m quarterly net loss after nine years in operation need not be a deal breaker. Revenue per user in the last quarter was $1.38. Spotify, which is profitable, reports over €6 ($7.15) per user.

Duolingo believes rival apps pose a risk — though its brand is the strongest in its field. The big existential threat is an AI translation tool that works well in real time. Zoom, Apple and Google are among the companies working on voice tech products. An electronic Babel fish — the living translator imagined by sci-fi writer Douglas Adams — might dissuade novices from ever bothering to learn a new language.

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Trading app Robinhood sets share price at low end of range in IPO

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IPOs updates

Robinhood has priced its shares at $38 apiece, the low end of its target range, reflecting slack investor demand for the highly anticipated initial public offering of the popular trading app.

The company, which aimed to sell 55m shares, had set a range between $38-$42 a share. While the hottest tech IPOs often price above of expectations, Robinhood’s value indicates that investor appetite was not insatiable for the brokerage’s stock.

The $38 final offering price announced late on Wednesday gives Robinhood a valuation of $31.7bn. Private investors previously valued it at more than $11bn in August. Shares are expected to begin trading on Thursday on the Nasdaq stock market.

California-based Robinhood became a venue of choice for many first-time stock investors, offering commission-free trades that it encouraged with rewards, bonuses and push notifications. With a median age of 31, its customers are often younger and have smaller account balances than those of established online brokerages such as Schwab, Fidelity and ETrade.

It has recorded explosive growth, doubling the number of accounts on its platform since the start of the year to 31m.

However, Robinhood has also come under fire from regulators for the game-like features on its app, limited customer service, and dependence on a controversial practice of selling trades called payment for order flow. In June the Financial Industry Regulatory Authority fined Robinhood $70m for causing “widespread and significant harm” to customers. It was the biggest penalty ever issued by Finra.

The offering allocated up to 35 per cent of shares to its own customers. Modest appetite for Robinhood’s IPO suggests investors were not immune to the recent high-profile scrutiny as well as concerns about how the brokerage would sustain its high trading volumes in a post-pandemic world where people had time for other pursuits.

Robinhood’s offering paves the way for a windfall for its executives and investors. At the IPO price, Robinhood co-founders Baiju Bhatt and Vlad Tenev would own shares worth $3bn and $2bn, respectively.

Index Ventures, the company’s largest outside investor, would have a stake worth $3.2bn.

Robinhood’s extraordinary growth has periodically led to technical outages during periods of elevated volume, and during a meteoric rise in shares of the meme stock GameStop in January the platform had to suspend trading and raise billions in order to meet capital requirements to market makers.

Investors that provided the $3.5bn in emergency funding stand to receive shares at a 30 per cent discount to the offering price, as their debt converts into equity.

Bhatt and Tenev will retain majority voting control over Robinhood through a dual-class share structure, meaning they will have a minimum of 65 per cent of the voting rights despite holding less than 20 per cent of the company’s shares.

This high level of voting control was cited by institutional investors as a concern in participating in the offering, despite Robinhood’s strong recent performance.



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