The discussion in recent years about “unicorns” — companies worth over $1 billion not traded on the stock market — has had an undertone of worry that the rise of unicorns was a problem.

The point of the public equity markets is supposed to be that they are an efficient source of capital for large, known companies. Why weren’t these companies eager to access that source? Had something gone wrong with the markets?

One story about why huge companies don’t go public as readily anymore is that the private capital markets have become an ever-more cost-effective source of corporate capital. Venture capital funds have more money to invest in private companies than they know what to do with, because wealthy people and entities are very eager to invest their money through venture funds so they can get in on the next Google.

The private markets are also not as private as they used to be: It’s easier for a broader set of investors to get into them these days — they can even do it though mutual funds — and so owners of private stocks have an easier time selling their shares than they used to. If insiders want to take their money out of their private companies and put it into something else — another company, a yacht, what have you — they don’t necessarily need to itch for IPO. The Wall Street Journal reports Carl Icahn sold his whole stake in Lyft(nearly 3 percent of the company) to George Soros just before the IPO.

And maybe company founders have been taking advantage of irrationality in the private markets. Maybe there’s so much cheap capital available from overly rosy private investors that there’s little point trying to sell shares to the general public. The role of SoftBank, the Japanese conglomerate that seems to be willing to buy a big piece of almost any hot company, is often cited as a particular distorting force that pushes up valuations.

Anyway, now Lyft has gone public, providing a useful test of whether the public markets can be as buoyant as the private ones. Its stock performance has been middling in the days since it started trading. But Lyft strikes me as a very imperfect candidate for the public unicorn test, because unlike some of its peers, Lyft loses money. A lot of money. And it’s not obvious what the plan is for Lyft to stop losing money in the future.

According to Lyft’s S-1 IPO filing, it lost $911 million in 2018 on $2.16 billion of revenue. That was an improvement of sorts from 2017, when the company lost $688 million on $1.06 billion of revenue; as the company has grown, it has lost more money, but it loses less money per dollar of revenue. Still, you can’t lose money on each transaction and make it up on volume. To become a mature company, you have to eventually find a way to makemoney selling your product.

In the S-1, Lyft points to its positive “contribution margin,” a non-GAAP financial measure that purports to compare customer revenue to the direct cost of providing rides. This figure is positive: Lyft’s “cost of revenue” in 2018 was just $1.24 billion, meaning ride-sharing provided a positive “contribution” of $920 million to the company’s income. That’s up from just $82 million two years earlier, which looks pretty good, even though the company’s income was sharply negative after you include all the costs other than “cost of revenue.”

A typical strategy in this situation would be to scale up your business, doing more individual transactions at a marginal profit and not growing your fixed costs too much, so that eventually you make profits overall. But two problems for Lyft are that it’s already quite big — it’s already acquired many of the customers who are its best fits — and a lot of its costs other than “cost of revenue” are, in practice, highly variable and must rise when revenue rises.

For example, many of the rider incentives Lyft provides — discounts and rebates, essentially — are excluded from the company’s “cost of revenue.” Instead, many of these incentives are counted as a sales and marketing expense. And as the company has grown, so has its spending in this area. The company spent $804 million on sales and marketing last year — nearly 40 percent of its revenues. $297 million of that was for incentives to riders and drivers, a figure that nearly doubled from the prior year.

The theory of Lyft’s medium-term profitability would seem to entail the company continuing to grow a lot, but without having to spend a lot to recruit and retain drivers in a strong economy, and without having to market aggressively and discount deeply to draw and retain customers, despite fierce competition. This does not match recent experience for Lyft or its competitors.

There are some bigger ideas about how Lyft could be profitable in the long run. Maybe driverless-car technology will revamp the company’s business model and greatly reduce its personnel expenses, allowing it to be profitable. Maybe. But then, who knows when (if ever) such technology will be commercially viable, and whether Lyft would be well-positioned to capitalize on a business that would be frankly very different from the personnel-heavy one it has invested in.

This brings me back to my opening question: Why is Lyft public? Start-up companies are typically privately held in part because they are small, but in part because their businesses are highly speculative. They benefit from having a limited number of sophisticated owners who are supposed to have both the expertise to evaluate a speculative company’s prospects and the patience to wait many years for a profitable, sustainable business model to emerge.

You would expect a company to go public in part because it needs access to the public capital markets to keep growing and in part because its business has become comprehensible enough to trade like any other stock, where you can look at statistics like profit margin and determine something about the company’s financial health.

Lyft does not meet the second criterion, and given the depth and froth of the private equity markets, it does not seem to meet the first criterion either.

One lesson Elon Musk has learned the hard way is that being public brings new regulatory scrutiny and an investor base that cares about quarterly earnings reports and is not necessarily prepared to buy your very long-range vision for profitability. He clearly wishes Tesla had stayed private.

You can think of these companies as overgrown adolescents. Just because they are big does not mean they are mature, and they may not yet be at the life stage where it is best for them to move out on their own. If you don’t have a clear road map to profitability — if seeing your profitable future requires a pair of Silicon Valley venture goggles — you may be best off staying private.


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