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  • Amazon-backed Deliveroo is under fire from delivery riders and fund managers ahead of its IPO next month.
  • They say its reliance on gig economy workers is variously unethical or a long-term cost risk.
  • The float is also test of UK investor appetite for unprofitable startups.
  • See more stories on Insider's business page.

Amazon-backed food delivery firm Deliveroo has faced a barrage of criticism in the run-up to its highly anticipated float on the London Stock Exchange, as big-name investors and activists criticized its reliance on gig economy labor and questioned its underlying business model.

Deliveroo is set to float on March 31, aiming to raise up to $2.5 billion and at a target valuation as high as $12 billion.

At least six investment firms have said publicly they would not invest in Deliveroo's float, including Aviva Investors, Rathbones, Legal & General, and Standard Life Aberdeen.

Also in the last week, the Bureau of Investigative Journalism published an analysis of 300 Deliveroo riders' earnings, based on invoices voluntarily submitted online, finding that two-thirds made less than the minimum wage.

Meanwhile the IWGB, a small but vocal trade union for gig economy workers, says it has organized Deliveroo riders to strike when the firm's float opens to retail investors on April 7, and published an investor briefing advising prospective backers to call the firm out on riders' rights.

Deliveroo's IPO will be a test for the UK startup industry, where valuations for privately held firms have become increasingly bullish. When CEO Will Shu chose to list in London rather than the US, it was heralded as a victory for a post-Brexit UK.

But its target valuation, as high as $12 billion, lack of profitability, and perceived business model risks have provoked skepticism this week.

The firm in its prospectus posted a £225.5 million ($311 million) pre-tax loss for the full-year 2020, a narrower loss than the £317.7 million ($438 million) it lost in 2019. Revenues were up 54% to £1.1 billion ($1.5 billion) from 2019.

"What's unusual is that it's going public at such a high valuation, at the top range, and it hasn't made a profit," Susannah Streeter, investment analyst at Hargreaves Lansdown, told Insider. "If it has to change the working conditions for its riders, that's going to eat into its profit forecast."

Uber's Supreme Court loss in February, which forced the ride-hailing firm to reclassify its drivers as workers with more rights, has raised the specter of regulatory action for Deliveroo.

While Deliveroo has won or settled similar regulatory fights in the UK, it has lost battles in Spain and Italy, and has set aside £112.2 million to deal with fines and costs. It still faces action from the IWGB in the UK, as well as legal action in France and the Netherlands.

"The winds of change are blowing, in terms of the gig economy going through a big upheaval," added Streeter.

In its 224-page investor prospectus, Deliveroo acknowledges the risk, stating:

"The independent contractor status of riders, which applies in most of the jurisdictions in which we operate, has been and continues to be the subject of challenge in certain markets, including in our key markets.

... The costs associated with defending, settling, or resolving pending and future litigation or governmental agency investigations relating to the independent contractor status of riders could be material to our business (including additional taxes and penalties) and, regardless of outcome, could negatively affect our reputation."

Aviva, the first investment firm to say it wouldn't back Deliveroo, cited its gig-economy model as a risk. (Insider's Theo Golden subsequently analyzed Aviva's holdings and found it had exposure to a number of other gig-economy firms, such as Uber.)

Equally seriously, fund managers are skeptical that Deliveroo can parlay its pandemic growth into long-term success.

Rathbones' chief strategist told Insider that Deliveroo's continued unprofitability made him wary, adding that the boom in takeaway during the pandemic would not continue after lockdowns lift. "I think people are extrapolating that this trend will continue, and I don't believe that," he said.

Streeter is likewise skeptical. "I think more people are going to want their food delivered from a waiter's tray than two miles on the back of a person's bike," she said.

Deliveroo signaled that it has had "significant" investor demand for its stock debut, which takes place March 31.

"This proud British business looks forward to listing on the London Stock Exchange," a spokesperson said, adding: "The Roadshow began on Monday and the deal was covered by demand across the full price range by the end of the first morning.

"Demand has continued to build since then, including via our community offer, and we look forward to welcoming new shareholders next week alongside our currently highly respected existing investors."

And while the firm acknowledged in its prospectus the risks to its business model from any reclassification of its 100,000-plus delivery riders, it publicly shot back against both the Bureau of Investigative Journalism's research and the IWGB union.

The firm argued that its riders were given "freedom" to accept or reject deliveries and that it received a regular flow of new driver applications. It argued that the Bureau's findings were "misleading" and "unverifiable" and that it had analyzed earnings of a minority of its 100,000-plus riders. It said riders can earn £13 per hour, higher than the national living wage of £8.72 per hour.

Post-pandemic growth is possible, according to Streeter, if the firm can boost the amount customers spend per order.

"If Deliveroo can corner the higher-end restaurant market — I think it's still got a bit of a takeout tag attached to it — there is potential for growth," she said. "That could offset losses if it was forced to change worker conditions."

"But," she added, "It does have competition, Just Eat, Uber Eats . There's lots of competition for Deliveroo's business."