Are the Lyft Founders Reading This?
“The market can stay irrational longer than you can remain solvent.” John Maynard Keynes
It’s been a crazy few weeks. If you’re a new member of The Invested Practice, welcome.
i) A Spate of IPOs
Lyft went public two weeks ago. Kindly, they did it on a Friday, so that on Saturday I had the time, without the distraction of new news, to notice they had gone public and see what had happened with their price the day before.
After Uber’s horrid privacy violations were made public, I deleted it from my phone, making Lyft my sole ride-service option when I’m in the US. Check out a screenshot of the email announcement the company sent out on Saturday morning. Guys, it highlights EXACTLY what we’ve been talking about. Subject line: “A public company invested in the public good”.
Below that intro, the first two sentences: “As Lyft goes public today, we’d like to thank you and everyone who has helped us get here. We’d especially like to recognize our drivers — you bring our mission and our values to life. Thank you.” It goes on to announce that Lyft is committing a minimum of $50 million per year or 1% of profits (whichever is greater) to community transportation initiatives to:
- Provide transportation to those who need it most
- Develop transportation infrastructures in underserved areas
- Create clean energy in cities
Mission. Purpose. Values. Almost to the point of being a bit on the nose. Do they read The Invested Practice? (Lyft founders Logan and John: if you’re here, put a red rose in one of your lapels tomorrow so I know it’s you.)
I love it. I love that they’re calling out Uber’s terrible record on values and privacy without ever using its name. I love that Lyft is leading with its Mission. I love that they directly emailed their users instead of confining the news of going public to the realm of finance geeks. This kind of equal opportunity investing is what I was looking for from Amazon.
What I don’t love as much is an unprofitable company going public, which people who don’t follow these sorts of things often take as confirmation that the company is profitable and stable. Many companies go public without being profitable or stable. The only thing required for going public is to provide required disclosures, including audited financial statements, and an expectation that the company’s shares will be purchased on the open market.
IPO stands for Initial Public Offering. It’s when a private company offers shares of ownership to members of the public on a stock exchange. Once a company offers its shares this way, people the company has never heard of and doesn’t know can buy shares (portions of ownership) of the company.
Typically, the company uses an investment bank to sell its shares to large funds before the actual public offering takes place. The investment bank takes the offering around to pension funds, mutual funds, sovereign funds, banks, and other large investors, and determines from the level of interest and excited what price to start with. However, not always. Spotify recently went public without using an investment bank at all, which was a disruption to the IPO status quo that was pretty cool to see.
So, that fact that a company goes public doesn’t mean anything good or bad about the quality of the company itself. It’s nothing but a fact about whether or not members of the public (that’s US) can easily buy shares in the company. Mr. Buffett recently explained why he won’t be buying Lyft anytime soon and why he doesn’t buy brand-new IPO companies, and it’s worth watching: he thinks he can find more reliable places to put his money.
However, many people don’t understand that, and when unprofitable companies go public, there’s a lot of talk about “ooh, it must be a great company.” Not only does not have to be a great company, we true investors (not speculators) avoid IPOs as a rule because we don’t have ten years of audited financial data to use to decide how trustworthy the company has been. Past performance is no guarantee of future results, but that data does give me a strong indication of what kind of company I would be buying. Without it, I’d be speculating. Which is ok, as long as we know that’s what we’re doing. These companies are fun to review because they’re changing the way we live, and that’s exciting.
What Uber and Lyft have done to change our transportation expectations is remarkable – where a few years ago, I was never even sure if a taxi would have a working credit card machine in the 21st CENTURY, now I expect to get picked up right where I am, not even have to speak to the driver to say where I’m going, and pay for it without having to open my purse. Fast Company has a great article about the changes ride-sharing apps have wrought. But Lyft has an uncertain business model. It’s not profitable, faces stiff competition from Uber and other ride-hailing apps, has no real competitive advantage that I can see (I can easily delete the app, as I did with Uber, and use a different one or call a taxi), and might get legislated out of business if government decides that its contractor-based system doesn’t meet privacy, worker, or employment standards.
It may be leading with its values because it doesn’t have anything better with which to lead. IPOs are exciting, but this company literally doesn’t make money. Being better than Uber at privacy and safety are its differentiating factors, so that’s what it’s highlighting in its message. Smart.
Amazon, by comparison and considering my difficult search for its Mission, compared to Lyft putting theirs front and center, doesn’t have to depend on such fluffy tactics. It’s profitable, has a huge competitive advantage by sheer scale and size, and the only real major regulatory/legislative concern it has is antitrust (it may be so large as to be considered a monopoly).
There are so many IPOs coming this year because these companies need to give a good exit to their early investors, and finally the market is receptive becoming again to tech IPOs. Uber has valued itself much higher than Lyft because it’s aiming for a much bigger scope than mere ride-sharing (while Lyft is sticking to what it does best). Airbnb is actually profitable, but is facing serious regulation around the globe to protect locals’ ability to afford their rents. While, on the other hand, Pinterest is a useful site that doesn’t directly contribute to worsening inequality (amazing!) and is setting up for a less-splashy IPO by actively tampering down expectations for a high price.
I was looking for info on Pinterest, and I stumbled on this hilarious site that somehow I’d never seen before. Do you know Dealbreaker? Warning: filled with questionable facts, bad language and intense sarcasm. But entertaining.
Extreme sarcasm example: “We have already teed off on Pinterest for going public at 17x revenue, but now we’re even more flummoxed by this IPO. If you’re already profitable, where’s the ephemeral promise of impossible growth that makes everyone forget you have no plans to actually create an environment in which profit is possible?”
Yes, WHERE? Where is the confusingly-priced IPO based entirely on future growth and a charismatic founder? WHERE is the offering of shares to the public to own part of a company that doesn’t actually succeed in its market yet?
Oh, RIGHT. Pinterest is a company that is primarily used by women, so it has to actually be GOOD to go public, or no one will believe in its confusingly-priced IPO based entirely on future growth and a charismatic founder. GOT IT.
To be fair, Pinterest had one barely profitable quarter at the end of 2017 and then another much more profitable one at the end of 2018, but on an annual basis is still losing money overall. But that’s a heck of a lot more profitable than its peer tech companies IPO-ing this year! Did you know that when Pinterest was pitching for early funding from the big VCs, so many passed on it because they didn’t get why anyone would want this product? Pinterest’s eventual funding came from venture capital funds with high-level women involved in the decision-making, who DID get it. Once Pinterest became a startup unicorn (i.e., one of the rare companies that provides a very high multiple return to its early investors), VC funds who had previously passed on it literally then, and ONLY THEN, started to realize that they should probably promote a woman (Or two? No? Too crazy?) in order to fix the massive blind spot in their investing perspective.
Now, I think it’s a VC firm’s prerogative to not prioritize diversity, as long as they don’t expect themselves to be or hold themselves out to their investors as being capable of understanding all sorts of companies. I know one wonderful firm in Colorado made up of only four decision-makers (as opposed to the large VC funds with many partners) who are all white males and wonderful investors, and I don’t think they’d ever expect themselves to understand a Pinterest, nor would they regret passing on it. That’s fine. Know your circle of competence.
But these bigger firms do expect themselves to spot every major deal and unicorn, and do so without recognizing their own blinders and limitations of scope, namely missing the perspective of more than half the population.
They sound like idiots, right? And yeah, putting a woman on the investment team is incredibly obvious. But the thing is, we ALL have those idiot blinders. We all live within our own heads, and we all think we are looking beyond ourselves, even when we’re not. It’s a necessary component of the human condition.
Indeed, to have some awareness of it is already a step forward.
So what are my blinders? I put together the following template to help identify the limits to my circle of competence.
ii) Know Your Blinders
Age: Mid-30s age – millennial.
Technology trajectory: Grew up with one of the first Macintosh computers in the house, with a dial-up modem when it was brand new, Compuserve, AOL, and was in college the year Facebook came out. I had a cell phone in college but only for emergencies. Texting required multiple presses of the number keys and was super annoying.
Passport(s): American nationality with European exposure (Portuguese husband, Swiss domicile)
Economic status: upper middle class
Economic trajectory: Relatively consistent upper middle class, though with dramatically less or more money at various points in my life. I have noticed that not many people have this kind of experience at different levels of economic comfort.
Economic summary: I’ve been poor and I’ve been rich. Being poor is hard. Being rich is better.
Money stuff trajectory: Was very interested in business as a kid (started businesses from my bedroom, fascinated by investing books) then parents’ divorce created huge money issues: financial insecurity, lack of trust. Struggled for a long time not know what I wanted to do as a job, before becoming a startup attorney and loving it. My health forced me out, closing a door, but opened a window into investing and dealing with that old money stuff, and now I’m back to loving it.
Circle of competence: My circle of competence is mass consumer brand companies that have products and services I actually use.
What I could do better in my investing practice: Decisiveness. I’m getting more confident in my decisions, but still not very decisive when it comes to investing decisions. Cautious to the point of doing nothing.
Investing blinders: Male-oriented companies. Non-consumer companies. Being overly cautious. Kid-related stuff.
What are your own blinders? Here’s a Template of Blinders:
Money stuff trajectory:
Circle of Competence:
What limits my circle of competence:
What I could do better in my investing practice:
What else would you ask yourself? What else should I have asked myself?
The market can stay irrational longer than I can stay solvent, but if I can stay solvent by knowing myself, prudently observing my blinders and circle of competence, and practicing for my weaknesses – then I should be able to last longer than the irrational market. As IPO season hits, I’m focused on strong fundamental investing.
iii) Expect (and learn from) Mistakes
There are a lot of lessons I learn in everyday life and the more I lean into my investing practice, the more they seem to directly and obviously apply to investing.
After we found out about the misprint on the cover of the Invested paperback, I went through all the stages of grief. First I was in denial, then I got angry, then bargained that maybe it wasn’t that bad, then depression – that was last week – and now, acceptance.
In denial, it was hard for me to talk about what happened without getting emotional, but I did moan about it to a few trusted friends. One said simply, “Tell everyone about it. It’s not actually that big of a deal. But if you don’t talk about it, you lose trust, and it could become a big deal.” He told me about a charity he had publicly supported financially which had a scandal that the leadership covered up. As soon as he found out, he said if they had told him about it right away, he would still have trusted them, despite the mistakes.Because they didn’t, and tried to hide it, he had to get away from them quickly for fear of what else he didn’t know about. “You have to talk about it,” he emphasized.
This wonderful advice yanked me out of my denial. I immediately emailed Mr. Buffett to tell him. Literally, I turned on my heel from that conversation, walked to my computer, drafted the email, spoke to my dad to confirm he was cool with me signing both our names, and sent the email to Mr. Buffett.
I wish I could tell you “and I felt so much better immediately!” But I didn’t. I still felt sad about the situation, and wished I wasn’t in that position. See, denial, still. But it did make me feel better to start talking about it and thinking of ways to shift my grief into something useful. I remembered to be thankful for my problems, and THAT shifted those feelings immediately, and made them a little lighter. Quickly, we came up with the idea for the treasure hunt, investigating potential donations, and started talking about the cover publicly. Hearing support from all of you made things easier.
So, in the future, when I make a proper investing mistake – when I fall in love with a company and buy up a bunch of its stock, and that company’s stock price goes down due to some information I didn’t know, or ignored, or completely missed, and that information changed the story of the company completely and the stock price likely won’t go back up again – when that happens, I will lean heavily on this experience.
I don’t control most things. I control myself. That’s it. When something shows up that I don’t like, shift it into something for which I can be thankful.
The real lesson here is the one my friend helped me find: Let everyone know, release it, and move forward. A mistake does not define you. My dad went through the bankruptcy of one of the companies he invested in a few years ago, and I certainly don’t think less of him for it. Circumstances occurred that were hard to foresee and possibly fraudulent (the shareholders are actually suing the company). He learned that debt can kill a company more quickly than anyone expected and that knowledge has already made him a better investor. I’m not a businessperson by training, so this situation has given me a new level of appreciation for those leaders of the companies I look at who practice candor about their mistakes (and those of their employees).
LET’S GET PRACTICAL
These IPOs are totally risky speculations rather than real investments, but for investing practice only, what the heck – it’s fun to learn more about new companies and be able to tell if it’s a potential investment in the future, after we’ve got a lot more financial information, or if the competitive advantage just isn’t there. Cocktail party conversation that makes us sound like investing whizzes about the hot companies of the moment? Yes please. Never discount the kick of joy you get when you can explain to some blowhard why he’s an idiot for buying Lyft right now (NICELY, obviously, we are kind value investors and need to maintain our reputation). Here are some places to start (obviously I don’t endorse any of the following links – these are simply interesting resources to provoke your own thoughts):
IPO filing with the SEC, called an S-1 (you can find the quarterly revenue data on pages 77-79)
NYU professor Damodaran says Lyft is priced too high
Ownership Disclosure: Danielle Town owns shares in Berkshire Hathaway (BRK) .