Three ways to avoid a big Deliveroo-style flop
Deliveroo's IPO – the most exciting new stockmarket flotation for a generation – turned out to be a big flop. It needn’t have been, says Matthew Lynn.
The £7bn stockmarket flotation of the food-delivery app Deliveroo was not quite the worst of all time. True, it dropped 30% from its issue price, slumping from 390p to 275p within the first few minutes of trading, hence earning its pasting as a “Floperoo”. But of all the listings since 1999, there are ten that did even worse. Even so, it was hardly a great success. More than 85% of initial public offerings (IPOs) over the last 20 years closed the first day of trading above their issue price; just 3% closed below the price they were sold at. Sometimes firms recover from that. Ocado dropped 7% below its issue price when it was floated, but has gone on to rise tenfold since then.
Others, though, sink into obscurity. Whatever happens to Deliveroo over the next few years, there is no question that the IPO went very badly. It was overpriced, there were too many questions around the business model and too much hype over its prospects. A series of gimmicks, including shares for riders and customers, were aimed at drumming up small investors. But anyone who put a few hundred pounds into the business will have been badly let down. It would have been better off leaving it to professional institutional investors.
That is not just a blow for the company, but for the City as well. After years of decline, with the total number of companies quoted on the market shrinking all the time, there were some signs of a revival. With 25 IPOs raising more than £7bn in equity, 2021 witnessed the best first quarter in 15 years for the London market. If Deliveroo had put some pizzazz into that and sparked a new wave of retail investors, the market could have staged a much-needed revival. A “Floperoo” was the last thing it needed, especially as many of those new small investors may now be put off for years. The City needs to find a way to turn that around. Here are three places it could start.
1. Price more cautiously
The investment bankers bringing a company to market see it as their job to maximise the price. The founders too typically want to get as much as possible for the business they are selling. Yet given that they usually remain the largest shareholders they also have an interest in making sure the reputation of the company is preserved. The banks should learn to be a lot less aggressive on price. It would have been far better to sell fewer shares in Deliveroo at 250p and then watch as the price drifted upwards on its first few days of trading. The firm would be worth a lot more over the medium term.
2. Be more experimental
When Spotify went public in New York it opted for a “direct listing” – it simply placed a block of shares on the market with no issue price and no formal marketing campaign. After that, the shares simply found their own level. As it happens, they have done really well: the value of the music-streaming service has doubled since then. There are lots of different ways of bringing a company to market without all the hype and hoopla of an old-style listing. Direct listing is one. We could also allow companies to sell a few shares through the crowdfunding sites to start with, establish a value, and then transfer those to the main stockmarket. Another alternative is an auction that is open to the public; it works on eBay so it is hard to see why it shouldn’t work for the equity markets as well.
3. Go easy on the hype
One of the problems with Deliveroo is that it operates in a fiercely competitive consumer market. Food delivery is driven by discounts and promotions, and there are huge legal challenges still in store over the status of its gig workers. Whether it can make profits in the long run is open to question. It probably can – as with Ocado and Uber, its critics seriously undervalue the brands and the underlying technology – but it is far from clear. A more straightforward business, with a defined niche and steady profits is probably more suitable for a float pitched at the retail market. A business such as Deliveroo would be better off with a reverse takeover or a direct listing.