An IPO is a Private Company Breaking Free of it’s Newborn Swaddle
The one thing I remember from the baby class we attended (this was over four years ago now!) was how to swaddle a baby. Remember those awesome hospital blankets your newborn was wrapped in? It’s like they contained magic powers to make the baby comfy, warm and snug.
Just seeing those blue stripes brings me back.
Once they grew out of the receiving blankets, we moved to sleep sacks with Velcro flaps which helped keep baby swaddled. Worked like a charm until around 3-4 months of age when both kids became so strong they broke out of the swaddle.
Then it was a week of tears and flapping arms until they learned to sleep sans swaddle. One trick I found useful was getting them used to it one arm at a time and starting during naps.
IPO’s and Swaddling
So how does an IPO (or Initial Public Offering) relate to swaddling? Quite simple!
An IPO is when a privately owned company decides to offer its shares to the general public for purchase for the first time. There are many reasons for a private company to go public, but generally the main reason is to generate capital (or cash). Private companies wanting to go through an IPO have generally reached a growth maturity point or are looking for significant cash to help sustain operational costs. It’s like the company is ready to break free of its own swaddle!
An IPO is a really big deal for a company – and rightly so. Along with a boat load of cash comes a ton of regulation and responsibility from federal regulators (the SEC in the United States, CSA in Canada).
Stages of an IPO
The process of going public is a long one and quite important. Here is a quick summary of how it works:
- The company will select an Underwriter (usually a large bank or investment bank, or several investment banks) who will determine the number of shares and the price at which each share will begin trading. The underwriter had a massive role in the IPO as they initially agree to buy the shares from the company and then sell them to distributors and the public.
- Lawyers, underwriters and experts from the company undertake Due Diligence – basically a ton of paper work to ensure regulatory requirements and financial obligations are met
- The company will form a Board of Directors
- The company and underwriters going on a marketing tour – generating interest in the upcoming IPO
- Underwriters set an IPO price – typically determined by the value of the company (usually done way in advance or in some cases revised several times based on interest). For example, Facebook was originally supposed to be priced at $28-$35/share but was revised up to $35-$38/share. They also increased the supply of shares being offered.
- The underwrites and company agree on a date to go public and shares are offered to the public for purchase via a major trading market.
Notable IPO’s
Over the last 20 years there have been some notable IPOs – especially during the tech boom. Here are a few you might be interested in:
Facebook – 2012 – IPO Price: $38/share vs. Current Price: $264 (considered one of the greatest IPO flops in history)
Google – 2004 – IPO Price: $85/share vs. Current Price: $1,529
Amazon – 1997 – IPO Price: $18/share vs. Current Price: $3,124
Beyond Meat – 2019 – IPO Price: $25/share vs. Current Price: $156
Uber – 2019 – IPO Price: $45/share vs. Current Price: $37
Lyft – 2019 – IPO Price: $72/share vs. Current Price: $30
Pinterest – 2019 – IPO Price: $19/share vs. Current Price: $37
Zoom – 2019 – IPO Price: $36/share vs. Current Price: $410 (talk about timing!)
Upcoming 2020/2021 IPOs
Airbnb – was supposed to happen in March but has been pushed back due to a massive decline in revenue amidst COVID-19
Bumble – sometime in 2021
Gitlab – November 2020
DoorDash – 2020 or 2021
SpaceX – 2020 or 2021
Robinhood – 2021
Coinbase – 2020/2021
Reddit – Late 2021
You can find read a more about the potential and upcoming 2020/2021 IPOs.
Are IPOs Good Investments?
The answer is sometimes. Investing on emotions is never a good thing and I’ve written extensively about that. Part of the IPO process is hyping the company up. Remember when Facebook was going through it’s IPO? There was so much hype and when the shares hit the market before you knew it there were down trading at $19/share. A big part of the IPO process is the marketing tour to drum up hype.
Do your own analysis and wait. Generally give the IPO some time to settle into the market and gauge demand. Some companies, like Facebook experience a deep correction once they begin trading. Like every good investment – patience is key!
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