Tech corporations’ preliminary public choices (IPOs) could be grossly mispriced, as evidenced by some corporations like Lemonade and Agora which have leapt up close to or even more than 150 percent in price after going public, CNBC reports.
The problem, according to venture capitalist Bill Gurley of Benchmark, quoted by CNBC, is the system.
“They are ignoring demand when they price. On purpose,” he wrote in a text message, according to CNBC. “This problem is systematic. Because the system is broken.”
What happens with tech IPOs is that investment bankers often hand over the underpriced stock to larger public money managers, who take advantage of immediate and giant-sized pops before other, smaller managers are able to participate. The issuing company, as a result, ends up making less money than it could have.
In the example of Lemonade, the company sold 11 million shares for $29 a piece. That netted it $300 million, with the investors getting a $444 million difference based on the closing price of $69.41. Lemonade’s cash and cash equivalents were around $567 million before the IPO — a big difference, CNBC reports.
Agora had a similar story, raising around $350 million in its IPO for shares that ended up being worth over $880 million by the end of trading, the stock price going from $20 to $50.50 on the first day.
In response to that IPO, Gurley Tweeted his exasperation “that there’s a monetary train on this planet involving lots of of thousands and thousands of dollars the place its OK to not even get to 50% of the particular finish outcome.”
Class V Group co-founder Lise Purchaser advised CNBC that it may very well be extra sophisticated than simply the first-day pop. She stated it might additionally imply the next worth isn’t sustainable.
“As administration groups should be accountable to their worker base, they typically select to cost to a price the basics help versus the worth the market needs to pay right this moment,” she stated, in response to CNBC. “One can actually solely inform if a deal was significantly mispriced if it maintains the opening commerce worth a number of months later.”