Having helped draft more than a few IPO prospectuses in our career, we can tell you that no other corporate document takes as much time and effort as an S-1. Everyone from founders, lead investors, management, bankers and (of course) lawyers want a say. They all know that you never have a second chance at a first impression. An S-1 is their best stab at creating the narrative against which the company will be judged not just on IPO day, but for years thereafter.
Ride-sharing company Lyft filed their S-1 on Friday, and we spent part of the weekend reviewing it. If you follow the industry or even simply use Lyft/similar services, there are not a lot of surprises in the document. Lyft, like most VC funded Tech unicorns, has strong revenue growth, large operating losses, and little in the way of physical assets. They pair users in need of transportation services with drivers/scooters/bikes and take a fee for that service. Simple enough.
At the same time, 3 things struck us as we reviewed how Lyft describes its business and all of them tell a larger story about public investing in tech-based disruption.
#1: While ride-sharing has been around for years, it is still very early days in terms of proving the concept can actually replace substantial numbers of personally owned vehicles. There is plenty of hype over this possibility in the Lyft S-1, to be sure. And while the logic is clear – personal vehicles sit idle 95% of the time – the substitution effect of ride-sharing versus individual ownership at scale is still a theory rather than provable fact.
#2. Over the years we’ve learned to take “Founders’ letters” seriously, and Lyft’s missive shows how differently it – and presumably other disruptive companies of similar vintage – thinks about its responsibilities to shareowners. Most of the letter relates to Lyft’s social goal, which is to “improve people’s lives” with better transportation options. The only explicit mention of profitability is in one sentence, and only then to warn that growth will take precedence in the near term.
#3. Since there is little in the S-1 that allows a reader to see a path to high levels of profitability (pre-tax losses of $978 million in 2018), one has to assume that investors will value the platform rather than the cash flows it generates. That’s not as oxymoronic as it sounds. Ride-sharing is a halfway house to an eventual world of autonomous vehicles. General Motors currently owns 7.8% of Lyft, and affiliates of Alphabet/Google own 5.3%. Both are actively working on self-driving cars. Both – or any other global automaker/tech company – could be eventual buyers of the asset if the world really does shift to ride-sharing.
Summary: what’s not discussed in an S-1 is more important than what’s included, and to us the obvious omission is a clear description of earnings power. Private capital got Lyft – and many other disruptors – to first base. Public equity will likely allow them to reach second, and at hopefully better valuations. But the remainder of the trip around the bases will come when the disruption they enable forces other companies to buy them.