Over the weekend, several VCs tweeted that my headline recappingStitch Fix’s first day of trading was too harsh. The headline read, “Stitch Fix up just 1% on first day of trading, after reducing size of IPO.”
I didn’t say it “fumbled” or label it as “weak” and “disappointing”likemany other media publications, but that would have been fair given that the fashion-in-a-box business missedits own stated expectations on deal size and price range. It seemed that some VCs assumed that my characterization of “just 1%” was advocating for the company to give new investors a discount, called a pop. Not exactly.
IPOs are typically priced so that they go up about 15%-30% on the first day.In my view, this is usually too muchbecause it means the company could have sold its shares for a higher price and raised more money (more on that, later). But regardless of how it should be, underwriting bankers presently advocate for a large pop. If it doesn’t hit that, it’s a signal of weak demand amongst new investors. In Stitch Fix’s case, this was compounded by a handfulof additional negative signals, including trading down from the opening price on its first day. (The 1% is just up from the IPO price that happens the night before. Only an exclusive group of institutional investors and hedge funders can buy into the IPO.)
When has Goldman not priced an IPO to pop?
— Dan Primack (@danprimack) November 19, 2017
A lack of pop is even more of a bad sign when the stock price is still below the originally proposed range. In this case, Stitch Fix announced that it wanted to price its shares at $18 to $20, selling 10 million shares. It priced at $15 and only sold eight million shares, meaning it raised $120 million, versus the $190 million it would have raised in the larger offering at the midpoint of the original range.
Not only did it raise less money than it was hoping for, Stitch Fix had trouble convincing the stock market to buy it at $15. Shares opened Friday at $16.90 and closed at $15.15. Only the smaller group of IPO buyers saw shares go “up.”
What’s more, is if you look at the first day of trading below, you’ll see that it was trending downward and at one point dipped beneath the $15 per share threshold. Where it flattens, it is likely due to the underwriting banks buying more shares to save face, as they often do. This implies that even if the IPO were priced precisely to meet demand, the actual price should have been even lower than $15.
But as Jeff Richards, partner at GGV Capital pointed out below, if the IPO filing range had been lower in the first place, then the IPO would have been labeled a success.
And if filing range had been $12-14, then the narrative is “huge success!”
— Jeff Richards (@jrichlive) November 18, 2017
I think that’s partially true and does show the importance of the underwriters and companies setting reasonable expectations ahead of time. But the company’s valuation would have still been down. According to Stitch Fix’s IPO filing, the company did a tender offer in November 2016, valuing shares at $22.61.
Some people also question whether reporters should write stories about “down rounds,” when companies raise venture capital at a lower valuation than theyhad previously. Of course, valuations are just a moment in time and could change. That’s also true of down days on the stock market. But whenever demand is beneath expectations, it can be an important indicator for relative values of other similar companies.
Richards additionally made the point that the first day of trading is often very different from long-term performance. We saw that with Facebook.
Definitely zero relevance to long term opportunity. Also wasn’t a great IPO. Also a true and exciting success story. All of these can be true.
— Barrett Daniels (@barr5tt) November 18, 2017
But not everyone is a long-term investor. Traders and other stock market enthusiasts have a right to accurate news and information about companies.
And while a disappointing first day isn’t always the best determination of short-term performance either, it can be. We saw that with Blue Apron.
Venture capitalists are naturally on the side of the companies because they can make a lot of money if a portfolio company goes public and they sell shares after the IPO. And VCs are very long-term investors, with returns evaluated on a ten-year-horizon or longer.
Ultimately, there are both sellers and buyers of the shares and journalists shouldn’t pick sides. We’re supposed to report information as accurately and fairly as possible.
Companies who are considering going public should also be made aware of the process and the success or lack thereof of recent IPOs. It’s especially relevant for “comparable” businesses, whose valuations are determined by comparing its progress to competitors.
In Stitch Fix’s case, some potential investors were concerned that the company could compete with Amazon and the many other category players. This was also a factor in Blue Apron’s skittish stock market reaction. This is a helpful warning for other potential Amazon competitors and their backers, regardless of whether the investor concerns are fair.
Yet there’s no question that IPOs are a great achievement for a young company. In Stitch Fix’s case, it was co-founded by CEO Katrina Lake in 2011 and she quickly grew it to a large business with $977 million in revenue for the latest year. It’s also turned a profit in some years, which is rare for young venture-backed businesses.
IPOs can create tremendous value, not only for VCs but for early employees who can now turn that equity compensation into cash. Generally, these shares are “locked-up” until about six months following the IPO.
There are a lot of trading days before the lock-up and even before Stitch Fix reports its first quarterly earnings. It’s possible that it will convince investors in the coming months that it deserves to be valued higher. Believers in the company may feel that they are “buying on the low and selling on the high.”
But why was there supposed to be a pop to begin with, you may ask? It’s often labeled as a “discount” to please the stock market. That may be a misnomerbecause it makes it sound like it’s doing this as a favor to new investors. Perhaps it should be a called a “cushion” because it helps protect the company’s stock from falling too much in the coming weeks. It can be hard to recover from a bad first impression.
While I personally feel that pricing 30% below expected market demand is usually too much, I’d argue that the IPO should be priced in a way that the share value holds until the company reports its first quarterly earnings. That’s easier said than done.
Take Snap, for example. Shares were priced at $17 at the time of its March IPO. They closed at $24.48, with gains of 44%.
At the time, I pointed out that if the company instead priced shares at $19, that the company would have raised an additional $400 million.
But Snap is presently trading around $13. If it had priced at $19, it would have lost stock market investors even more money. It’s hard to recover from a bad image.
As we’ve seen with Snap, Blue Apron, and possibly Stitch Fix, there’s often a disconnect between the way Silicon Valley values companies and the way Wall Street does.
The tech community looks for innovation and businesses that will create and redefine categories in the long run. Whereas stock market investors are often evaluating businesses on a quarterly basis. Companies with predictable growth tend to do best.
Regardless of who’s right or wrong, venture capitalists would do their portfolio companies a favor by helping them better prepare for stock market expectations. It’s not only in the best interest of companies, but also the venture capitalists who make the most money if they hold shares long after a successful IPO.
Stock market investors may be “wrong” in the way they evaluate companies, but until the investment philosophies of the masses change, it would behoove Silicon Valley to reconcile their differences.
FAQs
IPO Pop Defined
An IPO pop occurs when a company's stock price jumps higher on its first day of trading. An IPO pop may be a sign that underwriters did not properly price retail investor demand into the IPO price.
What do you mean by IPO? ›
An Initial Public Offer (IPO) is the selling of securities to the public in the primary market. It is the largest source of funds with long or indefinite maturity for the company. An IPO is an important step in the growth of a business. It provides a company access to funds through the public capital market.
What is the difference between IPO and POP? ›
The public offering price (POP) is the price at which new issues of stock are offered to the public by an underwriter. Because the goal of an initial public offering (IPO) is to raise money, underwriters must determine a public offering price that will be attractive to investors.
What is an IPO and how does it work? ›
Initial Public Offering (IPO) refers to the process where private companies sell their shares to the public to raise equity capital from the public investors. The process of IPO transforms a privately-held company into a public company.
Do VCs sell at IPO? ›
In an IPO, VCs can sell a significant portion of their investment in the entrepreneurial company either on the IPO date or within one year of going public. In a M&A, VCs sell the entire PC to an acquirer.
What is an IPO and why would a company go public? ›
Going public refers to a private company's initial public offering (IPO), thus becoming a publicly-traded and owned entity. Businesses usually go public to raise capital in hopes of expanding. Additionally, venture capitalists may use IPOs as an exit strategy (a way of getting out of their investment in a company).
Is IPO good or bad? ›
Purchasing shares of promising businesses during their IPO launches is an excellent way to generate wealth. This is because, if the company has substantial growth in the long term, the stock price will appreciate in value allowing you to gain massive profits.
What is IPO and why you should invest in it? ›
An IPO is an opportunity to pick winning stocks and support at a competitive price in the shares of future industry leaders that provide valuable earnings by way of stock appreciation. Due to the reasonable price, one can buy multiple shares of the issuer company at an affordable price.
Is buying IPO a good idea? ›
You shouldn't invest in an IPO just because the company is garnering positive attention. Extreme valuations may imply that the risk and reward of the investment is not favorable at the current price levels. Investors should keep in mind a company issuing an IPO lacks a proven track record of operating publicly.
Is Coca Cola an IPO? ›
In 1919, a group of businessmen led by Ernest Woodruff purchased The Coca-Cola Company from Candler for $25 million. Later that year, Coca-Cola made its initial public offering (IPO) on the New York Stock Exchange (NYSE), for $40 per share.
There are three IPO categories: retail investors, non-institutional investors, and qualified institutional buyers. The price band is the price range determined for book building issues. Not all retail brokers offer IPOs to their clients, and so IPOs are usually allotted to qualified or institutional investors first.
What is an example of an IPO? ›
The Biggest IPOs in the US:
Alibaba Group IPO with US$21.8 billion raised (September 2014) Visa IPO with US$17.9 billion raised (March 2008) Facebook IPO with US$16 billion raised (May 2012) General Motors IPO with US$20.1 billion raised (November 2010)
What is IPO and its pros and cons? ›
It is a type of sale that most companies do to raise capital. New securities issued for the first time are dealt with in a primary market. The company became publicly traded, and its a shares are available for free open market trading when listed on a stock exchange.
What are the pros and cons of an IPO? ›
The Pros and Cons of Going Public
- 1) Cost. No, the transition to an IPO is not a cheap one. ...
- 2) Financial Reporting. Taking a company public also makes much of that company's information and data public. ...
- 3) Distractions Caused by the IPO Process. ...
- 4) Investor Appetite. ...
- The Benefits of Going Public.
IPO stands for Initial Public Offering. As the term suggests, it happens when a company “offers” itself (or its shares) to the public. In an IPO, a private company offers new shares to the public in exchange for capital. This capital is then used by the company for growth.
How do VC firms make money from IPO? ›
VCs make money in two ways. Venture capitalists make money in two ways. The first is a management fee for managing the firm's capital. The second is carried interest on the fund's return on investment, generally referred to as the “carry.”
Do VCs beat the market? ›
The best venture capital funds have outperformed the markets by a lot. Indeed, both academic and industry data indicate that Venture funds demonstrate particularly high dispersion – that is: the difference between the best performing VC funds and the rest is enormous.
Who do VCs raise money from? ›
Venture capital funds raise money from traditional investors who act as limited partners. These partners could be pension funds, banks, insurance companies, university endowments, or other financial institutions.
What is the disadvantage of IPO? ›
Initial public offerings cost a lot of money. One of the greatest costs connected with IPOs is the extremely high underwriter fees. The transaction expenses will increase even further if a company decides to work with a financial reporting advisor or other specialized organizations.
What happens when a company goes into IPO? ›
An initial public offering (IPO) is when a private company becomes public by selling its shares on a stock exchange. It does this by working with an investment bank and it is subsequently required to undertake a substantial amount of due diligence and meet regulatory requirements.
An IPO allows a company to raise equity capital from public investors. The transition from a private to a public company can be an important time for private investors to fully realize gains from their investment as it typically includes a share premium for current private investors.
What is the major advantage of IPO? ›
One advantage of a company going public through an IPO is the ability to raise substantial capital now and in the future on public capital markets when SEC registration filings, including shelf offerings, become effective.
What is the advantage of using IPO? ›
IPO allows companies to raise capital by selling shares. Moreover, companies don't have to repay the capital raised through the issuance of IPO. Companies can offer stock as an incentive, bonus, or as part of an employment contract.
What if I invested $5000 in Amazon in 1997? ›
Amazon (AMZN 2.90%) has generated massive multibagger gains since its initial public offering (IPO) on May 15, 1997. The stock went public at $18, or a split-adjusted price of $1.50 per share. If you had invested just $5,000 in that IPO, your stake would be worth nearly $11.4 million today.
Is Mcdonalds an IPO? ›
Stock Split
McDonald's Corporate's initial public offering was April 21, 1965. Since going public in 1965, McDonald's has executed 12 stock splits.
Does Warren Buffett own Coca-Cola stock? ›
Warren Buffett Coca-Cola Co
The investor owns 9.29% of the outstanding Coca-Cola stock. The first Coca-Cola trade was made in Q4 1998. Since then Warren Buffett bought shares ten more times and sold shares on eight occasions. The stake costed the investor $13.2 Billion, netting the investor a gain of 95% so far.
What would happen if I invested $1,000 in co*ke 10 years ago? ›
By investing 1000$ in KO 10 years ago, you would have earned a total dividend of 428$ (until 2023-04-18).
What is the difference between IPO and stock? ›
Definition: An IPO or Initial Public Offering connotes the first time a privately-owned venture decides to list its shares on the market for sale to the general public. However, regular stock investments or FPOs refer to the issue of fresh shares by a company that's already listed on the stock exchange.
What are the 4 characteristics of IPO? ›
Following are the four features of IPO's that confuse financial economist:
- Under-pricing of the Initial Public Offering on the average basis.
- Post-Initial Public Offering performance.
- IPO markets that are hot and IPO markets that are cold.
- Incur of relatively high cost in the issuance of IPO.
Top 10 IPO in India 2023 (By Performance)
| Company Name | Listing Date | Issue Price (Rs) |
|---|
| Sah Polymers Limited | Jan 12, 2023 | 65 |
| Divgi TorqTransfer Systems Limited | Mar 14, 2023 | 590 |
| Radiant Cash Management Services Limited | Jan 04, 2023 | 94 |
| Udayshivakumar Infra Limited | Apr 03, 2023 | 35 |
3 more rowsList of the Biggest IPOs of All Time
- Saudi Aramco - $25.6 billion.
- Alibaba Group - $21.7 billion raise.
- Softbank Corp - $21.3 billion.
- NTT Mobile - $18.1 billion.
- Visa - $17.86 billion.
- AIA - $17.78 billion.
- EneL SpA - $16.45 billion.
- Facebook - $16.45 billion.
Upcoming SME IPO List in India (Latest & Recent SME IPOs)
| Upcoming SME IPO 2023 | IPO Date | Price (INR) |
|---|
| Spectrum Talent | Coming soon | Coming soon |
| Vasa Denticity | 23 – 25 May | Coming soon |
| Crayons Advertising | 22 – 25 May | 62 – 65 |
| Remus Pharmaceuticals | 17 – 19 May | 1,150 – 1,229 |
6 more rowsMoreover, a company taking the IPO route is most likely to be exposed to risks such as dissatisfied shareholders, confidentiality and trade secret concerns, insider trading by the directors, new stakeholders constantly judging the company's performance, amongst others.
Which factor would be most likely to lead to a successful IPO? ›
A successful IPO hinges on consumer demand for the company's shares. Strong demand for the company will lead to a higher stock price.
What are the 7 steps to getting an IPO? ›
IPO Process Steps:
- Step 1: Hiring Of An Underwriter Or Investment Bank. ...
- Step 2: Registration For IPO. ...
- Step 3: Verification by SEBI: ...
- Step 4: Making An Application To The Stock Exchange. ...
- Step 5: Creating a Buzz By Roadshows. ...
- Step 6: Pricing of IPO. ...
- Step 7: Allotment of Shares.
Sales Charges
The price you pay when purchasing a mutual fund is called the Public Offering Price (POP) and includes the sales charge. The POP is higher than the Net Asset Value (NAV) price of the mutual fund, which is the price that is received when the shares are sold.
What does pop mean in trading? ›
The Probability of Profit, or more commonly referred to as POP, is the theoretical probability of your equity/ETF position(s) making at least $0.01 on a trade. POP derives from a set of variables such as position type, whether you are long or short, time, and volatility (for the distribution curve).
What is Coca Cola's IPO? ›
In 1919, a group of businessmen led by Ernest Woodruff purchased The Coca-Cola Company from Candler for $25 million. Later that year, Coca-Cola made its initial public offering (IPO) on the New York Stock Exchange (NYSE), for $40 per share.
Is pre-IPO stock worth it? ›
Pre-IPO investing offers potential high returns by investing in private companies before they go public. However, it also carries risks such as illiquidity, difficulty in picking winners, and loss of capital.
Does a successful IPO mean your stock price goes down? ›
The IPO creates a different dynamic, because the company itself receives the proceeds from a higher sale price. During an IPO, the CEO and company's goal is to maximize cash receipts for the company. The best indication of the company's success in that effort is a stable to decreasing stock price following the IPO.
The Full Form Of POP is a Point of Presence Or Post Office Protocol.
Why do stock prices drop after IPO? ›
After an IPO, the price of the stock will fluctuate as investors buy and sell the shares. IPOs are typically highly volatile for the first several months of their existence. To company management, employees, and investors, the aftermarket performance of the stock is vital.
What is an example of a POP marketing? ›
POP marketing is a part of the point of purchase, and specifically refers to any marketing or sales promotion strategies that are used by a location or company to encourage the purchase of their product(s). Displays, billboards, signage and advertisem*nts are all examples of POP marketing.
What is proof of product POP? ›
Proof Of Product (POP) is theessential document in commodities trading negotiation process. The POP is sent by the bank of the supplier to the bank of the buyer to evidence that the product (commodity) does really exists.
What is McDonald's IPO? ›
McDonald's Corporate's initial public offering was April 21, 1965. Since going public in 1965, McDonald's has executed 12 stock splits.
Why did Warren Buffett buy Coca-Cola stock? ›
Warren Buffett's Berkshire Hathaway made a significant investment in shares of beverage giant Coca-Cola in 1988, when the stock's price was depressed following a market crash. Buffett and others at Berkshire recognized Coca-Cola's market advantages, believing that the company was poised to recover.
Did Warren Buffett sell his Coca-Cola stock? ›
Warren Buffett Coca-Cola Co
That's 7.75% of their entire equity portfolio (3rd largest holding). The investor owns 9.26% of the outstanding Coca-Cola stock. The first Coca-Cola trade was made in Q4 1998. Since then Warren Buffett bought shares ten more times and sold shares on eight occasions.
What is the downside of an IPO? ›
One major disadvantage of an IPO is founders may lose control of their company. While there are ways to ensure founders retain the majority of the decision-making power in the company, once a company is public, the leadership needs to keep the public happy, even if other shareholders do not have voting power.
What are the disadvantages of investing in IPO? ›
Initial public offerings cost a lot of money. One of the greatest costs connected with IPOs is the extremely high underwriter fees. The transaction expenses will increase even further if a company decides to work with a financial reporting advisor or other specialized organizations.
