One of tech’s hottest stories this month was Deliveroo’s IPO. From the outset, Deliveroo should have been a runaway success on London’s stock market, given its healthy growth and backing from tech giants like Amazon. Instead, it set the record as London’s worst IPO in its history – not quite the success it expected. Pricing, timing, uncertain business prospects and its gig economy workforce were cited as the reasons for its flop, with the treatment of its workforce being of a particular concern among investors.
Whether it was simply the wrong timing for Deliveroo to go public, given the UK’s emergence out of lockdown, or that the numbers weren’t quite right to start with, there seems to be a shift in the way in which investors and fund managers are thinking about which companies to invest in. And a huge part of that shift involves reputation.
What makes a successful IPO?
In the past, we’ve seen some of the fastest-growing tech start-ups have huge success on the stock market, and the repercussions have had a positive impact on their reputation too – dating app Bumble made its stock debut on Wall Street in February this year, making its founder, Whitney Wolfe Herd, the world’s youngest billionaire at age 31. Airbnb also went ahead with its IPO in December 2020, despite travel restrictions halting huge parts of its business, and the company still managed to see success, passing the market cap of travel giants Booking and Expedia and making it the 10th best debut in 2020 based on price gain from its IPO.
But what truly makes an IPO successful?
According to a report from PwC in 2019, elements that are likely to make IPOs more successful include the likes of: a large, growing addressable market, a unique and differentiated business model, and an attractive product or service, among others. All of which relate to business growth and appeal to the market, and all of which Deliveroo seemed to tick off from the outset. But investors are also beginning to factor in other elements, particularly those associated with reputation and ethics, when deciding to invest in companies. Larry Fink famously highlighted in his 2021 letter to CEOs that issues such as climate change and purpose are pivotal to creating durable value, and companies that pose a climate risk are also an investment risk. For Deliveroo, concerns over workers' rights due to its gig economy-led workforce was a risk that investors weren’t willing to take, given the ethical and legal issues involved.
Gig economy – a blessing and a curse?
On the surface, the gig economy sounds like an appealing concept, to employees at least – workers are self-employed and often given the freedom to choose when and where they can work. It means they can potentially dip their toes into several industries if they want to and work in shifts which can be better for work life balance. It’s the ultimate flexible working scheme in modern employment, albeit with downsides, mainly that there is no fixed salary and other benefits that employees experience such as holiday or sick pay. This business model is coming under intense scrutiny by regulators, watchdogs and the judiciary. The Supreme Court recently ruled Uber drivers are workers rather than self-employed following a long-running legal battle, causing the share price to dip due to the impact the ruling could have on the viability of the firm’s business model.
And it’s not just the gig economy that has shed light on the treatment of workers and its effect on reputation. Throughout the pandemic, we saw many companies being called out for their poor treatment of staff when navigating furlough and redundancies, causing their customers to react by boycotting the brand completely. It’s no wonder that investors are becoming increasingly concerned over how businesses treat their staff when it could directly affect sales.
The reputational risk of investing
The investment game involves many, huge risks but it seems reputational risk is becoming progressively more common as investors focus on ways to improve their stances on ethics. Fund managers are shifting away from the traditional narrative and no longer want to be associated with companies that contribute to climate change, have the majority of their employees on zero-hour contracts or other ethical, social, and economic issues because of the potential reputational repercussions.
'Ethical fund manager' isn’t a term that is widely used yet in the investment industry, but with ethical investments outperforming traditional funds in recent years, it’s clear that the industry is moving forward in this way. Investors need to be aware of how a company is dealing with various issues that could potentially damage their business and if they don’t know how to deal with certain issues, it then becomes a reputational problem for the business and the investors – especially if it hits the headlines as a potential scandal and directly impacts the overall value of the business. In Deliveroo’s case, the gig economy model, while as modern as it is, could become a reputational problem in the future if they get into trouble with their employees.
That said, it could also end up going the opposite way too. Reddit’s WallStreetBets subreddit, which famously drove GameStop’s share price earlier this year, turned to investing in gorilla conservations more recently, much to the surprise of the big financial institutions. While the subreddit is made up of amateur investors, and therefore on a smaller scale, the move managed to increase awareness of the gorilla conservations, landing multiple stories in mainstream media – a win for awareness and their reputation.
Shaping reputations for future
Deliveroo’s IPO flop stemming from issues with its workers and how they are classified is a sign that companies need to take ethical issues just as seriously as other business operations in order to be successful in the market and protect their reputation, whether they decide to IPO or not.
Companies often view reputation as something to be protected during a crisis or major issues outbreak, but the truth is that reputations are being shaped all the time by both positive and negative factors. Forward-thinking companies will monitor and manage their reputations constantly, checking on the views of significant third parties, and putting plans in place to adapt to good news and bad!
Need help shaping your business’ reputation? Check out our Firefly Guide to Reputation Shaping, to find out more.