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. 

Recommended

I wish I knew what contagion was, but I’m too embarrassed to ask
Too embarrassed to ask

I wish I knew what contagion was, but I’m too embarrassed to ask

Most of us probably know what “contagion” is in a biological sense. But it also crops up in financial markets. Here's what it means.
21 Sep 2021
Why is the UK short of CO2 and what does it mean for you?
UK Economy

Why is the UK short of CO2 and what does it mean for you?

The UK is experiencing a carbon dioxide shortage that could lead to empty shelves in supermarkets. Saloni Sardana explains what’s going on and how it …
21 Sep 2021
What to invest in to beat soaring energy prices
Investment strategy

What to invest in to beat soaring energy prices

As gas and electricity prices hit the roof, John Stepek explains how to invest to offset higher energy bills.
21 Sep 2021
Are Spacs just for suckers?
Investment strategy

Are Spacs just for suckers?

This year has seen a big boom in activity by special purpose acquisition companies (Spacs) in the US and the Spac craze is spreading to other markets…
21 Sep 2021

Most Popular

The times may be changing, but don’t change how you invest
Small cap stocks

The times may be changing, but don’t change how you invest

We are living in strange times. But the basics of investing remain the same: buy fairly-priced stocks that can provide an income. And there are few be…
13 Sep 2021
Two shipping funds to buy for steady income
Investment trusts

Two shipping funds to buy for steady income

Returns from owning ships are volatile, but these two investment trusts are trying to make the sector less risky.
7 Sep 2021
Should investors be worried about stagflation?
US Economy

Should investors be worried about stagflation?

The latest US employment data has raised the ugly spectre of “stagflation” – weak growth and high inflation. John Stepek looks at what’s going on and …
6 Sep 2021