One of the requirements of an S-1 filing are “Risk Factors.” It is where the company has to sit down, be humble, and acknowledge its weaknesses, highlighting where it could run into problems down the line.
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There are a host of common risk factors. “We have a history of losses and we may never achieve profitability” is common amongst tech companies. And, of course, there’s market competition and concerns over being able to sustain growth. But then there are also some truly interesting, business-specific risks that we found while re-reading a number of SEC filings this week.
Here are the five most interesting risk factors from some of the most-anticipated IPOs of 2019.
1. Lack Of Pea Protein
- The company: Beyond Meat.
- IPO date: May 2, 2019.
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.
Never would I have thought that pea protein would be so critical to a business that a company would consider a lack of it a major risk. But when you’re Beyond Meat and pea protein is a key ingredient for your product, any disruption to its availability could be catastrophic.
Beyond Meat CEO Ethan Brown previously told The Verge that it uses pea protein because it’s available in large quantities and, more importantly, it isn’t soy. Consumers indicated early on that they didn’t want more soy in their diet, Brown said, so the company settled on pea protein.
In its S-1, Beyond Meat said it relied on only one pea protein supplier (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.
Susan Fowler’s 2017 blog post, which was alluded to in the S-1, detailed the workplace culture at Uber and it led to major public backlash against the company. The #DeleteUber campaign, among other controversies, also didn’t help the ride-hailing giant’s image.
A company’s brand is important to its success, and other consumer-facing companies have also listed maintaining their brands among their risk factors. But Uber took it a step further, detailing the events of 2017 that made its reputation take a hit and laying out how it planned to address distrust in the company (namely, by releasing a transparency report).
This risk factor is interesting because it takes a normal risk factor—maintaining a brand—further. It’s not just an issue of maintaining brand; it’s a we-need-to-fix-our-brand problem.
3. People Behaving Badly In The Building
- The company: WeWork (The We Company).
- IPO date: Upcoming.
If our employees, members of our community or other people who enter our spaces act badly, our business and our reputation may be harmed.
Again, reputation. This time, though, the company’s reputation could be risked not by its own own actions or workplace culture, but by the actions of people entering its co-working spaces. WeWork explained in its S-1 that while it verifies the identity of people who want to join the WeWork community, it doesn’t conduct extensive background checks. So if WeWork members, employees, or someone else in the building does something illegal or unethical or violates WeWork’s policies, WeWork could get bad press and others could be less inclined to use the co-working space.
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.
Music licensing is expensive and complicated. And if you don’t do it correctly (or do it at all), you will likely face legal consequences. Peloton learned this the hard way when it was hit with a $150 million lawsuit by a group of music publishers in March, Rolling Stone reported. The lawsuit alleged that Peloton used thousands of songs without permission to stream on its $1,995 bike.
If you’ve ever exercised without music before, you know it can be miserable. Music is also key to the Peloton experience, and the company notes that it can’t force third parties to license their music. If it saw limited access to music, the dearth of tunes could negatively impact its business.
5. What’s Real, What’s Fake?
- The company: TheRealReal.
- IPO date: June 28, 2019
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.
The RealReal 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.”
Illustration Credit: Li-Anne Dias