Deliveroo flop leaves UK tech feeling rattled: Market fears thriving sector may have lost its golden touch
It had been hailed as a ‘golden year for UK tech’, with a string of star companies making their stock market debuts.
But after Deliveroo’s disastrous float this week, some wonder if such optimism for 2021 has been misplaced.
Ahead of the listing, Deliveroo unveiled a valuation as high as £8.8billion – setting the company up to be London’s biggest listing for a decade.
Even Deliveroo’s backers concede that the float flop has shaken confidence in what was previously expected to be a huge year for Britain’s technology sector
The food delivery firm even boasted rare endorsements from the likes of Chancellor Rishi Sunak.
But within days, the mood around Deliveroo’s float turned sour as big investors lined up to denounce the firm’s working practices and governance arrangements.
As it fought the public relations crisis, Deliveroo slashed its valuation to £7.6billion – the lowest end of its range – while insisting that demand from investors remained high.
But bosses and bankers were left humiliated on Wednesday as trading began, when the company’s shares crashed by as much as 31 per cent.
The tumble in stock price, from 390p to 287.5p, left tens of thousands of small investors who backed the company out of pocket.
And the slide continued yesterday, with the shares finishing another 1.9 per cent, or 5.45p, lower at 282p.
Defenders are quick to point out that the company still raised £1billion in capital and that the firm’s fortunes may recover.
But even Deliveroo’s backers concede that the flop has shaken confidence in what was previously expected to be a huge year for Britain’s technology sector.
While some such as ecard retailer Moonpig and bidding websites business Auction Technology Group have seen shares rise after floating, others including reviews website Trustpilot have struggled to keep momentum.
The mood around Deliveroo’s float turned sour as big investors lined up to denounce the firm’s working practices and governance arrangements
Yesterday Trustpilot’s shares closed at 265p, the same as its listing price.
So was Deliveroo’s brutal drop just down to bad timing or was it a one-off?
Analysts remain divided. In the run up to the float, investors had criticised the firm’s business model – using ‘self-employed’ riders on bicycles and mopeds – as ‘unsustainable’ and vulnerable to legal challenge.
They also raised concerns about special shares that will give founder Will Shu outsized voting powers for at least three years.
During the pandemic, Deliveroo benefited from a huge surge in sales as those under lockdown ordered more takeaways – but this still wasn’t enough to prevent it from posting a £224million annual loss in 2020.
The company insists it is still investing heavily in expansion and that the market opportunity remains huge.
In other words, Deliveroo is pursuing the classic tech strategy of seeking scale over profits to begin with – a path famously trodden by others including Amazon, the firm’s biggest investor.
But Ian Whittaker, a veteran City analyst, believes that in the end Deliveroo’s fundamentals still did not justify the price it asked for.
He dismissed claims that the firm’s shares had been driven down by short sellers alone, adding: ‘Trying to blame the falls on mysterious hedge funds is an age-old trick.’
Others argue that Deliveroo has become a victim of changing pandemic trends and central bank policy, with investors now seeking traditional safe haven stocks.
Fabian de Smet, head of investment banking at Berenberg, said: ‘Deliveroo got caught in the middle of a huge rotation. It was the last IPO of the old Covid world.’
And others worry that Deliveroo’s flop could put off other British firms from taking the plunge this year.
‘I really hope this doesn’t shut down the IPO market,’ one person close to the firm’s float told the Financial Times.
Companies still slated to make their own debuts this year include cyber security provider Darktrace, savings app Pensionbee, money transfer firm Wise and biotech star Oxford Nanopore.
Investors will be hoping that Deliveroo’s listing was just the exception, rather than the rule.