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https://archive.vn/FVPYd https://archive.vn/FVPYd I have wondered if there are predictors of when average returns of IPOs will be high. When the IPO market is

https://archive.vn/FVPYd https://archive.vn/FVPYd I have wondered if there are predictors of when average returns of IPOs will be high. When the IPO market is hot and it is easy to list, that may be a bad time for retail investors to buy IPOs when they start trading.

bombcar 4y ago
I suspect IPOs are almost always dumping on the public. Some go on to perform great afterwards but on the whole if you think your shares are worth more than they’re priced why would you sell in an IPO?
- martinald 4y ago
  Well in theory you have a much more liquid market to sell into in an IPO.
- jacquesm 4y ago
  That's true to some degree. Historically an IPO was to raise capital for the company, now, more often than not it is to create a market for the stock so that early stockholders can cash out.
  - notfromhere 4y ago
    There's also an implicit maturation of the business since you have to comply with filing requirements, etc.
- EGreg 4y ago
  VCs prop up money-losing unit economics to “reduce friction” while making the company grow quickly and dump on the public. Figure out the business model later. Rinse and repeat. For example WeWork with Neumann or Uber with Kalanick. Is negative unit economics better than a token with absolutely no utility? I would say yes - because they often create a valuable marketplace that serves customers and pays providers. They just find out later that they are in a race to the bottom with other platforms. Which means healthy market competition. However, if the stock continues to do well, it means the shareholder class (now representing public shareholders) continues to extract rents from both sides of the ecosystem. Uber is still extracting rents years later… drivers pay it half what we pay them. An open source platform economy would have been better for the public, with none of the controversy of Big Tech platforms. All these Ubers could have been had source competitors a long time ago. Why don’t they?
- vitus 4y ago
  Liquidity / diversification comes to mind. Let's say you own $10M in privately-held Stripe stock. You think that stock is probably worth $100M, but you'd like to buy a $2M house. The bank doesn't accept your privately-held stock as collateral for a mortgage. It'd make sense to sell some portion of your stock to buy that house. Now, suppose instead you think there's a 95% chance the stock goes to 200M, but a 5% chance sketchy financials tank the entire company and it's worthless. Especially in the aftermath of the FTX meltdown, I've heard plenty of second-hand stories about people who were fabulously wealthy on paper, and then suddenly not wealthy at all. Diversification would have limited some of the risk and preserved some of the wealth, at the cost of part of the upside. Your expected value might go down, but your worst-case scenario goes up.
  - bombcar 4y ago
    There's lots of reasons for small stockholders to want an IPO (so they can sell) but it's the reason the BIG stockholders push for it that bring it into question. https://www.nasdaq.com/articles/what-happens-to-ipos-over-the-long-run-2021-04-15 https://www.nasdaq.com/articles/what-happens-to-ipos-over-th... has some interesting numbers, and lots of what it shows seems to fit the "dumping". Of course, if I owned any stock in a pre-IPO company I'd want to dump it as fast as I could, too. IPO companies are rarely profitable, after all.
- sidlls 4y ago
  Two reasons come to mind, and both applied in my case last year: 1. Diversification: the vast majority of individuals owning pre-IPO shares almost certainly hold options, and in tech companies at least where regular employees get these options few of these individuals are likely to have a large, diversified portfolio. 2. For those same individuals, it's often a life-changing event. (In my case, I went from servicing 6-figures of medical debt and 5-figures of student loan debt and contributing the minimum to my 401k to a 7-figure net worth with income producing, debt-serviced assets.)
  - bombcar 4y ago
    Sure, for the shareholders, especially the small ones, it's great to get out from under the stock (owning stock or options in your place of work is the worst kind of non-diversification).
- llampx 4y ago
  This is exactly what I think as well and I got a serious education on this with the whole WeWork fiasco and that stopped me from losing my money investing in IPOs. I was going to invest in Snowflake and Airbnb. Also check out what GoPro stock IPO price was and today's price. The company can be fine but the stock can just not recover.
- chrisgd 4y ago
  Sounds like an overly pessimistic view. You IPO to allow early investors to exit and raise capital to expand. There are a lot of very successful IPOs from before 2020 and some of those that went public in the last two years will be ok
  - bombcar 4y ago
    From the people buying an IPO a "very successful" one is one that was under-priced and goes on to produce outsized returns afterwards, this means the company owners sold below some "real value". The most successful IPOs for the company are where it sells a bunch of stock at prices that then stay steady or even go down, they traded (potentially worthless) paper for real cash. I suspect the majority of IPOs are "successful" in the second way even though they're "sold" as being (a chance?) at the first way.
    - chrisgd 4y ago
      We don’t know that. We sometimes see small trades post IPO 100% higher than the IPO price but rarely would an investment bank turn down more money to give a better deal to a client. If there were 15 investors offering $100M at one time, they are going to be firm on the price they pay. A trade of 100 shares post IPO is not relevant. In fact, we did a bunch of SPACs because they offered better “price discovery” and we are seeing the results.
fairity 4y ago
> When the IPO market is hot and it is easy to list, that may be a bad time for retail investors to buy IPOs when they start trading. Yes, it's a known phenomenon that IPO's that list during periods of high activity perform worse over time. See https://onlinelibrary.wiley.com/doi/10.1111/j.1540-6261.1991.tb03743.x https://onlinelibrary.wiley.com/doi/10.1111/j.1540-6261.1991...

bombcar 4y ago

I suspect IPOs are almost always dumping on the public. Some go on to perform great afterwards but on the whole if you think your shares are worth more than they’re priced why would you sell in an IPO?

martinald 4y ago
Well in theory you have a much more liquid market to sell into in an IPO.
jacquesm 4y ago
That's true to some degree. Historically an IPO was to raise capital for the company, now, more often than not it is to create a market for the stock so that early stockholders can cash out.
- notfromhere 4y ago
  There's also an implicit maturation of the business since you have to comply with filing requirements, etc.
EGreg 4y ago
VCs prop up money-losing unit economics to “reduce friction” while making the company grow quickly and dump on the public. Figure out the business model later. Rinse and repeat. For example WeWork with Neumann or Uber with Kalanick. Is negative unit economics better than a token with absolutely no utility? I would say yes - because they often create a valuable marketplace that serves customers and pays providers. They just find out later that they are in a race to the bottom with other platforms. Which means healthy market competition. However, if the stock continues to do well, it means the shareholder class (now representing public shareholders) continues to extract rents from both sides of the ecosystem. Uber is still extracting rents years later… drivers pay it half what we pay them. An open source platform economy would have been better for the public, with none of the controversy of Big Tech platforms. All these Ubers could have been had source competitors a long time ago. Why don’t they?
vitus 4y ago
Liquidity / diversification comes to mind. Let's say you own $10M in privately-held Stripe stock. You think that stock is probably worth $100M, but you'd like to buy a $2M house. The bank doesn't accept your privately-held stock as collateral for a mortgage. It'd make sense to sell some portion of your stock to buy that house. Now, suppose instead you think there's a 95% chance the stock goes to 200M, but a 5% chance sketchy financials tank the entire company and it's worthless. Especially in the aftermath of the FTX meltdown, I've heard plenty of second-hand stories about people who were fabulously wealthy on paper, and then suddenly not wealthy at all. Diversification would have limited some of the risk and preserved some of the wealth, at the cost of part of the upside. Your expected value might go down, but your worst-case scenario goes up.
- bombcar 4y ago
  There's lots of reasons for small stockholders to want an IPO (so they can sell) but it's the reason the BIG stockholders push for it that bring it into question. https://www.nasdaq.com/articles/what-happens-to-ipos-over-the-long-run-2021-04-15 https://www.nasdaq.com/articles/what-happens-to-ipos-over-th... has some interesting numbers, and lots of what it shows seems to fit the "dumping". Of course, if I owned any stock in a pre-IPO company I'd want to dump it as fast as I could, too. IPO companies are rarely profitable, after all.
sidlls 4y ago
Two reasons come to mind, and both applied in my case last year: 1. Diversification: the vast majority of individuals owning pre-IPO shares almost certainly hold options, and in tech companies at least where regular employees get these options few of these individuals are likely to have a large, diversified portfolio. 2. For those same individuals, it's often a life-changing event. (In my case, I went from servicing 6-figures of medical debt and 5-figures of student loan debt and contributing the minimum to my 401k to a 7-figure net worth with income producing, debt-serviced assets.)
- bombcar 4y ago
  Sure, for the shareholders, especially the small ones, it's great to get out from under the stock (owning stock or options in your place of work is the worst kind of non-diversification).
llampx 4y ago
This is exactly what I think as well and I got a serious education on this with the whole WeWork fiasco and that stopped me from losing my money investing in IPOs. I was going to invest in Snowflake and Airbnb. Also check out what GoPro stock IPO price was and today's price. The company can be fine but the stock can just not recover.
chrisgd 4y ago
Sounds like an overly pessimistic view. You IPO to allow early investors to exit and raise capital to expand. There are a lot of very successful IPOs from before 2020 and some of those that went public in the last two years will be ok
- bombcar 4y ago
  From the people buying an IPO a "very successful" one is one that was under-priced and goes on to produce outsized returns afterwards, this means the company owners sold below some "real value". The most successful IPOs for the company are where it sells a bunch of stock at prices that then stay steady or even go down, they traded (potentially worthless) paper for real cash. I suspect the majority of IPOs are "successful" in the second way even though they're "sold" as being (a chance?) at the first way.
  - chrisgd 4y ago
    We don’t know that. We sometimes see small trades post IPO 100% higher than the IPO price but rarely would an investment bank turn down more money to give a better deal to a client. If there were 15 investors offering $100M at one time, they are going to be firm on the price they pay. A trade of 100 shares post IPO is not relevant. In fact, we did a bunch of SPACs because they offered better “price discovery” and we are seeing the results.

fairity 4y ago

> When the IPO market is hot and it is easy to list, that may be a bad time for retail investors to buy IPOs when they start trading. Yes, it's a known phenomenon that IPO's that list during periods of high activity perform worse over time. See https://onlinelibrary.wiley.com/doi/10.1111/j.1540-6261.1991.tb03743.x https://onlinelibrary.wiley.com/doi/10.1111/j.1540-6261.1991...