Deliveroo shares down nearly 30% since its debut

Let it not be said that Deliveroo isn’t a fantastically convenient company. Throughout lockdown a steady flow of food from some of my favourite restaurants has provided much needed cheer. Sadly, for the company executives, popularity and ubiquity does not necessarily mean profitability and without profits London investors can be punishingly sceptical – as the company has found out in what has been dubbed “the worst IPO in history”.

At the time of writing,  Deliveroo’s share price has fallen nearly 30% to 281.93, down from the initial asking price of 390p a share. This shellacking by the markets is a bitter pill to swallow not just for the company but also for Rishi Sunak and the Treasury. Deliveroo’s IPO was supposed to act as proof that the City could do tech IPOs too – at a time when British start-ups like the online used car dealership like Cazoo have been heading to New York to be listed on the stock market. The UK had even tweaked its financial regulations to try and make itself more attractive – reducing the amount of stock that had to be listed, changing prospectus requirements, and introducing dual class share structures that give company founders more power.

All this, however, has been to no avail, and may have made things worse. Deliveroo adopting a dual-class share structure was one of the reasons so many of London’s top fund managers stayed away from the float. The decision also meant Deliveroo couldn’t be listed on the FTSE 100 depriving the company of investment by index-tracking funds that buy shares in every company on the index. Several of the UK’s fund managers have stayed away from the float because of suspicions over Deliveroo’s long-term earnings potential prompted by concerns over workers’ rights and the low level of pay being paid to its riders. Some fear that Deliveroo may face legal challenges like Uber and have to shell out higher wages to its workforce. 

Other factors also played a role in its early flop. Rising bond yields have generally decreased some of the appetite for stocks and shares, particularly in flashy tech companies. Deliveroo itself is likely going to see its revenues dip in the near future as the lockdown starts to lift.

However, most fundamentally Deliveroo’s business model already looks dysfunctional. Deliveroo not only has yet to turn a profit some research suggests it actually makes a loss on every delivery it makes. Indeed, even as its reach has expanded its losses seem to have only deepened.

For some much vaunted tech companies not turning a profit isn’t a problem – it’s almost a status symbol. After all, Tesla made its first profit last year 18 years after it was founded and Uber has yet to make one. Perhaps American investors are generally more willing to take this gamble be it due to cultural reasons, the mythology of Silicon Valley, or the fact that a decade of loose money has left lots of cash washing around.

Still, in both cases they have been able to promise investors that they had something special – incredible new electric vehicle tech and enormous global reach – that they claim will deliver immense profits down the line. In the absence of actual technological innovation – apparently no longer necessary to be called a tech company – all Deliveroo could offer was relative ubiquity. However, as said such ubiquity seems to only increase its losses.
Indeed, even in American markets some of the sillier IPOs can crash and burn. WeWork, a company which listed not just huge losses but an apparently insane founder, had to cancel its IPO due to market sentiment. With Deliveroo perhaps London investors maybe simply made the calculation that a company which sets fire to an ever increasing piles of money the bigger it gets wasn’t a great bet.