As a rule, I do not give a damn about how much money bankers make. They have always done well, and I expect they will continue to do so. Similarly, I am unconcerned about how much money venture capitalists make. Sure, it’s fun to calculate deal-specific returns now and again, but I could not care less about any individual VC’s take-home pay. However, we must consider both today since we must discuss direct listings, IPOs, and to value private firms. Yes, we are referring to Amplitude’s recent initial public offering (IPO).
The following looks at the IPO price problem and businesses are trying to avoid it by using other listing techniques. We will wrap off with some highlights from an interview with Amplitude CEO Spenser Skates on the subject. This is for you if you are interested in the worth of private enterprises and they are valued. If you do not, find anything else to read; you will be bored out of your socks.
We questioned earlier this week if direct listings might address the IPO price problem. Alternatively, to put it another way, may direct listings combined with last-minute private-market funding help firms avoid IPO flops on the first day?
When a company’s initial public offering (IPO) is priced lower than where it begins to trade, is known as an IPO pop, a small amount of soda is typically seen as healthful, a huge pop is seen as a mistake.
In concrete words, if a business does an IPO for $45 per share and starts trading at $46, it did a decent job. Even $48 would consider uncontroversial. When a company’s stock is priced at $30 and opens at $45, it does not matter if its shares fall to the ground later. At least in the view of the corporation and its private-market supporters, sin has been committed.
Startups and their investors both irritated IPO pops for two reasons. To begin with, they indicate that the startup might have obtained more money or the same amount of cash with less dilution. That is logical. Second, when free money is given to others, such as when bankers price an IPO too cheap while gaining a large allocation in the sale for their own customers, it irritates founders (rational) and venture investors (less reasonable).
The IPO pop problem has gotten worse in recent years, as several big-ticket public offerings have had extraordinary first-day outcomes, opening to trade or shutting as public firms valued substantially more than their initial public offering price.
A direct listing is one strategy to avoid an IPO pop. A corporation that has a direct listing simply starts trading. A reference price is established, but it is mostly a fictitious figure that people disregard. It does not make a difference. Furthermore, because the firm in issue does not establish a formal price for itself, it is immune to a mispriced IPO. We have solved the problem, hurray!
We have not, however. Everyone can agree that IPOs have certain positive aspects, the most important of which is that they raise primary capital. That is, the firm that wishes to list its shares on a standard exchange sells stock in the transaction. That is why it must set a price; it must identify a price at which it will sell primary shares in its first public offering.
A direct listing eliminates the price issue, but it can be a little like throwing out the baby with the bathwater if a firm also has to obtain funds for operations, growth, or anything else.
As a result, unicorns have devised a clever solution that looks to be a workaround: raise a large, last private round of money before rapidly directing listing. As a result, the company’s pricing and its ability to trade no longer linked.