Is The Lyft IPO A 'Panic Moment' For Venture Capitalists?

A see-saw first couple of weeks continued for Lyft Inc LYFT Monday after the stock dipped 3.5 percent to once again fall back below its $72 IPO price. The stock was trading down another 3.67 percent Tuesday afternoon. 

While the dust settles on Lyft’s share price, traders are already looking ahead to other high-profile IPOs — and what Lyft’s lackluster start to life on the public markets means for the latest class of venture capital darlings such as Uber, Pinterest PINS and Palantir.

Lyft priced its IPO at $72 and opened trading on March 29 at over $87. Almost immediately, the stock was met with selling pressure that drove the price down to a low of $66.10 by the following Tuesday. Lyft shares bounced off the $66 level and finished last week’s session at $74.45 before stumbling once again. 

Lyft Sentiment Plummets

After a wave of positive investor sentiment prior to Lyft’s IPO, StockTwits trends show a marked shift in sentiment as soon as the IPO occurred. On March 28, Lyft had 70-percent bullish sentiment among the platform's users. 

On the day of the Lyft IPO, that sentiment shifted to just 32-percent bullish. Two trading days later, sentiment was down to 27-percent bullish.

This precipitous drop in IPO sentiment stands in stark contrast to recent high-profile IPO Levi Strauss & Co. LEVI, which saw its bullish sentiment hit 80 percent the day prior to its IPO, drop to 77 percent on IPO day but then rebound to 87-percent bullish within two week’s time.

The bad news for Uber investors is that the shift in Lyft seems to be dragging down Uber sentiment as well.

On March 28, bullish Uber sentiment stood at an impressive 91 percent. By Lyft’s IPO day, that bullish sentiment was down to 69 percent. By April 2, Uber’s bullish sentiment had fallen below 50 percent to just 48 percent of StockTwits mentions.

Early indications of heavy short selling are not surprising given the extremely bearish sentiment numbers for Lyft. By April 4, 13.4 million shares of Lyft were held in short positions, or roughly 41 percent of the company’s total public float, according to financial technology and analytics firm S3 Partners.

VC Implications

Hedge fund manager Harris Kupperman, who runs Praetorian Capital, recently discussed Lyft’s lukewarm IPO and what it means for the venture capital community. The market may be starting to wise up to the dangers of investing in companies with explosive revenue growth but no profits and unproven business models, he said. 

“This must be the panic moment amongst the VC community. Suddenly, their mark-to-fantasy valuations are in doubt,” Kupperman wrote.

The VC community is likely scrambling to find some way to prop up Lyft’s share price in the near-term, or they run the risk of spooking the market about Uber and the other high-profile IPOs on the horizon, he said. 

“Without retail idiots gladly taking these scams off their hands, VC portfolios will detonate," Kupperman said. 

“Furthermore, since anyone who’s bought a share of LYFT on the stock exchange is underwater, I suspect that the desire to buy the next of these unicorn IPOs will be substantially reduced.”

Next Litmus Test

Pinterest will be the next test for the 2019 unicorn IPO class. On Monday, Pinterest launched its IPO road show and set an initial target price range of $15 to $17. That price range suggests a $9-billion valuation, or roughly a 15-percent discount to its valuation during its last round of private funding back in 2017.

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Photo courtesy of Lyft.