The Weirdest “Risk Factors” In 2019’s IPO Filings

Reports

September 16, 2019

One of the requirement for S-1 filings are "Risk Factors". It is a chance for a company to acknowledge its weaknesses and publicly declare what could get in the way of its success.

Over-hyped IPOs are becoming one of the main themes of 2019. There have been huge surprises, good and bad, with some of the most highly valued scale-ups’ stocks plummeting just after going public, but also some success stories (think Beyond Meat, Zoom…). It’s been an important reminder of the volatility faced by fast-growing companies at every stage: there are always some risk factors that must be taken into account.

Indeed, one of the requirement for S-1 filings are “Risk Factors”. It is a chance for a company to acknowledge its weaknesses and publicly declare what could get in the way of its success.

Some of these risk factors are quite typical. There are common themes among tech companies that appear across different sectors and business models: a “history of losses” is one of these, “Brexit” has been the favourite one for UK companies for a couple of years now. This year, however, has seen some really interesting risk factors, which exemplify the incredible diversification reached by the world of innovative companies.

Here are the five most interesting risk factors from some of the most-anticipated IPOs of 2019.

1. Lack Of Pea Protein

“Our future business, results of operations and financial condition may be adversely affected by reduced or limited availability of pea protein that meets our standards.”

Beyond Meat is hands-down the best performing stock on this list, and has been a huge surprise in this IPO season, going public at $25 per share and peaking at almost 10 times that at the end of July. Beyond Meat is currently trading at around $150, which is still a 6x increase on their original pricing.

As CEO Ethan Brown previously told The Verge, Beyond Meat uses pea protein as the key ingredient for its plant-based products. He went on to explain that while soy has been more commonly used as an alternative protein source in similar products, consumers were reluctant to introduce more soy in their diet, which is why his company eventually opted for peas.

The company’s pea protein supplier, Puris, recently received a $75 million investment from beef producer Cargill. The investment will help Puris double its pea protein production, according to CNBC.

At the time of its IPO, Beyond Meat relied only on Puris for its pea protein supply (another risk), but since then it’s brought on a second supplier. In Brown’s interview with The Verge, he also said it plans to diversify its protein sources in the future.

2. Reputation Matters

  • The company: Uber.
  • IPO date: May 10, 2019.

“Maintaining and enhancing our brand and reputation is critical to our business prospects. We have previously received significant media coverage and negative publicity, particularly in 2017, regarding our brand and reputation, and failure to rehabilitate our brand and reputation will cause our business to suffer.”

In case you missed it, Uber was object of a sexual harassment scandal in 2017, when engineer Susan Fowler shared details of Uber’s sexist workplace culture on a blog post which led to major public backlash. The scandal led two of Uber’s top executives to resign, and it wasn’t the only public controversy that hugely damaged the ride-hailing giant’s brand.

While public-image issues are quite common risk factors in S-1 filings, Uber’s one goes in such detail into how their brand was damaged and how it needed to be fixed, that it almost sounds like an apology. The company states that they plan to release a transparency report and have, since then, published numerous campaigns aimed to restore public trust.

3. People Behaving Badly In The Building

“If our employees, members of our community or other people who enter our spaces act badly, our business and our reputation may be harmed.”

WeWork is about to go public in the middle of a media storm highlighting financial, ethical and strategic red-flags that are causing the company’s valuation to plummet from the staggering $47bn obtained during their previous funding round.

While they did not address such matters in too much detail in their S-1 filing, that has been called a “masterpiece of obfuscation” by one analyst, they did mention that the lack of background checks on individuals wanting to join the WeWork community could eventually harm the company’s reputation.

While WeWork does carry out identity check for new joiners, they do not conduct extensive background check against companies and people utilising their premises. Should these be involved in illegal or unethical activities, WeWork’s public image could also be harmed in the process.

4. Dropping The Beats

  • The company: Peloton.
  • IPO date: Upcoming.

“We cannot compel third parties to license their music to us, and our business may be adversely affected if our access to music is limited. The concentration of control of content by major music licensors means that the actions of one or a few licensors may adversely affect our ability to provide our service.”

You’d expect this statement to come from Spotify’s or SoundCloud’s CEO, certainly not from a fitness company!

Unless you’re a diehard cycling fan who also hates leaving the house, chances are you haven’t come across Peloton. The NYC-based company develops state-of-the-art at-home fitness equipment aimed at designing a workout experience that enhances your performance without training at a gym or outdoors.

What does all of this have to do with music licensing? Well, Peloton was hit with a $150m lawsuit by a group of music publishers back in March, alleging that Peloton embedded the streaming of thousands of songs without permission on its bike. Have you ever exercised without music? It’s basically torture. That’s why music licensing is key to Peloton, and limited access to it could prevent their products from delivering the workout experience they so thoroughly designed.

5. What’s Real, What’s Fake?

“As an online marketplace for pre-owned luxury goods, our success depends on the accuracy of our authentication process. Failure by us to identify counterfeit goods could adversely affect our reputation and expose us to liability for the sale of counterfeit goods.”

TheRealReal wants to be the go-to place for authentic luxury consignment. So if counterfeit goods slip through into the inventory, that could hurt the company’s brand and cost them money.

The RealReal has a team of authenticators to make sure the items are all real, but the company acknowledged in its S-1 filing that it couldn’t be 100 percent sure it catches all of the counterfeits consigned to it. The RealReal notes that “as the sophistication of counterfeiters increases, it may be increasingly difficult to identify counterfeit products.”

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