This year's IPO class is the least profitable since the tech bubble, and the marketing used by buzzy tech startups isn't drawing capital like it used to. Investors are more interested in profitable businesses than those boasting rapid growth, and some companies were late to realize the shift, Turo CEO Andre Haddad said.
"I think the markets have been very unforgiving with the companies that are burning a lot of cash, and are not showing material changes in their profit margins," the car-sharing startup's chief executive said in an interview. "If you're a startup and you're in that camp, then you've got to change."
The adjustment may be a product of some companies' flashy marketing and troubling bottom-line performance.
Peloton branded itself as a media company and a technology platform, but posted a net loss every year since its 2012 founding. When the exercise-bike company went public, its stock tanked 11% and wiped out more than $900 million in investor wealth.
WeWork was once the most valuable US startup, but the company pulled its public offering after analysts balked at its lofty promises, annual losses, and leadership choices from former CEO Adam Neumann. The company went from being valued at $48 billion to bankruptcy talks in just six weeks.
Several other companies gambled on glitzy messaging in their bids to go public, but a new focus on fundamentals seems to have taken companies by surprise. The shift reflects a change in risk appetite, and investors are less inclined than ever to give money to cash-burning firms, Lonne Jaffe, managing director of venture capital firm Insight Partners, said.
"If you believed the market was going to give you incredibly cheap capital even through your story was messy, that was the window that closed," Jaffe said. "It's not to say it's not a good company or it shouldn't exist. What you're seeing is a more accurate or better pricing of risk."
Goldman Sachs CEO David Solomon recently spoke up on the renewed interest in profitability over growth. The investment bank took an $80 million hit from its investment in WeWork during the third quarter, and the chief executive said the heightened expectations will yield a better investing environment down the road.
"It's important for people to grow, but there's got to be a clear and articulated path to profitability. I think there's a little bit more market discipline coming into play and I think that's healthy for markets," Solomon said on Bloomberg TV.