Therese Poletti's Tech Tales: WeWork is a symptom of a disease that may not have a cure

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The spectacular blow-up of the proposed public offering of WeWork’s parent company We Co. shows that the public markets are savvier than private investors about buying into the hype of high-value, high-risk unicorn companies masquerading as tech companies.

The public market’s response to the most recent batch of these mega-private valuation companies? A firm, “No thanks.”

“The Street has gotten sort of stale on the idea of hope,” said Daniel Morgan, senior portfolio manager at Synovus Trust Company. “I don’t think [the IPO window] is shut, but there has got to be more deals like Zoom ZOOM, -3.40%  and Pinterest PINS, +0.30%, where you have a light at the end of the tunnel…You have to have a [business] model that is profitable eventually.”

Read also: How the IPO market is pushing back on growth at all costs private companies.

The seeming tide of never-ending losses at We, Uber Technologies Inc. UBER, -0.51% UBER, -0.51% Lyft Inc. LYFT, -2.98%, and Peloton Interactive Inc. PTON, +0.40% has become a problem for investors, along with corporate governance issues at companies like We and Peloton.

Before the We Co. completely shelved its IPO, the office-sharing company was planning to go public with three classes of stock, ensuring majority control would remain with Founder Adam Neumann, who stepped down last month as CEO but remains non-executive chairman. As a private company, We had a valuation of $47 billion at the time of its last funding raise. But ultimately, its bankers could not even take it public at a valuation of $15 billion.

“I think the message is that a path to profitably that does not require magical thinking matters,” said Lise Buyer, founder of Class V Group, a consulting firm which advises company management on the process of going public. “So does corporate governance, and at what valuation it is being offered.”

Zoom Technologies, a corporate video streaming service, and Pinterest Inc., a photo pinning social network, as Morgan from Synovus pointed out, have an actual technology product. But the biggest losers in the IPO market in recent months beyond the We Co. are companies that claim to be tech companies, but are really using technology to enhance a product, such as a car service from Uber and UBER, -0.51% Lyft, Peloton’s exercise bike, and Fiverr International Ltd. FVRR, +1.02% a freelance job-seeking hub that has trademarked the word gig.

“The market is trying to sniff out the truly disruptive companies and it’s rewarding the ones that are capable of growing robustly while still preserving their margins,” said John Dodd, chief investment officer at Catalyst Private Wealth in San Francisco. “We have also seen the market hammer some ‘tech-enabled’ companies that may leverage technology for growth but really don’t deserve the multiples that analysts gave them.”

Uber, Lyft and Fiverr are all considered gig economy companies, with their networks of contract workers, a business model that is under attack from legislators and litigators. Last month, California passed a bill that would require Uber and Lyft to treat their contract workers as employees. The bill is set to go into effect in January, but both companies are so far ignoring it.

Investors have been clear about how they feel about tech-lite companies with no profits. Lyft, which went public in March, has seen its shares tumble nearly 50% and is now trading at a market cap of $12 billion, compared with the last valuation as a private company of about $15 billion.

Since going public in May, Uber’s shares are down about 30% and it has a market cap of about $51.8 billion, compared with its last private company valuation of about $76 billion. Peloton, which has been trading for about a week, is down about 10%, with a market cap of about $7 billion, higher than its last funding round valuation of $4.1 billion.

Renaissance Capital, which tracks IPOs and operates IPO exchange-traded funds, noted that 39 deals raised $10.1 billion in the third quarter, led by health care and tech. The next really big multibillion-dollar valuation deals are expected to be home-sharing company Airbnb and Palantir Technologies. But while Airbnb is still expected next year, Bloomberg reported last month that the money-losing data analytics company is looking for “significant” financing from private investors, a move that could delay its IPO by two or three years.

Silicon Valley venture capitalists, however, appear to be trying to fight back against the valuation disconnect. They held a summit on Tuesday attended by many private companies that are looking at going public. According to a Reuters report, the summit discussed the merits of direct listings, the method Slack Technologies WORK, +2.45% used to go public and avoid Wall Street investment banks. Airbnb, which is said to now be profitable, is expected to go public with a direct listing.

One of the summit’s organizers, Benchmark Capital General Partner Bill Gurley, described the banks as “fleecing” companies in their stock market debuts, by pricing deals too low to ensure a big first-day pop, which is money left on the table by the companies, Reuters reported.

Even so, companies that look to direct listings are still allowing the market decide on their valuation, and if they are another faux-tech company, or have no path to profits, the market’s response is likely to be stern.

Whether or not the latest events will change how other big-name, high-value deals go forward in IPOs is uncertain. In the last decade, companies have waited much longer to go public, opting instead for round after round of private capital.

That’s not likely to stop anytime soon, as long as the spigot keeps flowing. But when they finally get ready to go public, the companies with good growth and a clear path to profitability should prevail, while the wannabes will likely be punished.