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In defense of the IPO, and how to improve it

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Re: In defense of the IPO, and how to improve it

#11

Post by gonehome »

teej wrote: post #9
Ericson2314 wrote: post #5

Excellent breakdown with the proper theory. However > In an institutional fundraise, all buyers must get the same price Isn't that the basic problem? Don't we have tons of auction theory on how to not sell all at the same price? presumably that auction theory also properly doesn't confused the varying unit price vs total money raised (it's integral).

Seems very strange to leave out any discussion of auction models for pricing, like Google and Spotify used.

Did Spotify do this? I think only Google did and Spotify was just the first to do a direct listing.

Re: In defense of the IPO, and how to improve it

#12

Post by bobbylcraig »

gonehome wrote: post #10

The counter argument in favor of direct listing: https://podcasts.apple.com/us/podcast/invest-like-the-best/i... I’m not sure anyone is arguing SPACs are a better idea for the private company? SPACs can offer some certainty in what may be an uncertain market, but their entire point is that the SPAC creator is selling this certainty by finding an undervalued company they can take over on the cheap. I think a SPAC is a…

I've always been confused by DPOs. Isn't it essentially a money-grab by initial investors waiting to cash out if you don't need the capital infused by the IPO?

Re: In defense of the IPO, and how to improve it

#13

Post by gonehome »

bobbylcraig wrote: post #12
gonehome wrote: post #10

The counter argument in favor of direct listing: https://podcasts.apple.com/us/podcast/invest-like-the-best/i... I’m not sure anyone is arguing SPACs are a better idea for the private company? SPACs can offer some certainty in what may be an uncertain market, but their entire point is that the SPAC creator is selling this certainty by finding an undervalued company they can take over on the cheap. I think a SPAC is a…

I've always been confused by DPOs. Isn't it essentially a money-grab by initial investors waiting to cash out if you don't need the capital infused by the IPO?

It gives liquidity to employees as well as initial investors and it gives the public the ability to buy shares.

Re: In defense of the IPO, and how to improve it

#14

Post by unishark »

bobbylcraig wrote: post #12
gonehome wrote: post #10

The counter argument in favor of direct listing: https://podcasts.apple.com/us/podcast/invest-like-the-best/i... I’m not sure anyone is arguing SPACs are a better idea for the private company? SPACs can offer some certainty in what may be an uncertain market, but their entire point is that the SPAC creator is selling this certainty by finding an undervalued company they can take over on the cheap. I think a SPAC is a…

I've always been confused by DPOs. Isn't it essentially a money-grab by initial investors waiting to cash out if you don't need the capital infused by the IPO?

Theoretically you still get the capital, assuming you can sell the stock well enough yourself. A DPO just avoids paying the million(s) to an underwriter.

Re: In defense of the IPO, and how to improve it

#15

Post by TooSmugToFail »

Ericson2314 wrote: post #5

Excellent breakdown with the proper theory. However > In an institutional fundraise, all buyers must get the same price Isn't that the basic problem? Don't we have tons of auction theory on how to not sell all at the same price? presumably that auction theory also properly doesn't confused the varying unit price vs total money raised (it's integral).

I believe this is partly due to long term relationships aspect of the IPO process.

During roadshows, underwriters are essentially leveraging their rolodexes. These relationships constitute a significant part of the value they are bringing to the table.

If there would be a different price for each investor, some would get a better price than others, and those that got a worse price would not feel very good about it, likely deeming it unfair (there are still people behind the processes, and people can't help but experience emotions of fairness and a lack thereof).

As a result, relationships would likely suffer due to this human aspect to it, and weirdly enough, these grudges can easily get absorbed in the 'institutional memory' and linger there long after the original human protagonists have left the organisation.

A way to address this, would be to introduce rules like first-come-first served, which would imply giving up a degree of control by underwriters and the company. This, however, introduces risk for the company which, after all needs that control in order to maximise value.

It's not a simple problem to solve, but maybe there is a better solution somewhere out there...

Re: In defense of the IPO, and how to improve it

#16

Post by dperfect »

This makes sense from an investor’s perspective. My objection to IPOs is not so much financial, but more about what it does to a company’s internal culture. Having been at a company that went through an IPO, I saw how that culture shifted - almost overnight. You had employees that once cared about doing their best at their jobs to ones that focused only on how their contributions would affect the public stock performance (which can overlap, but often doesn’t). Every time the stock price took a (short-term) hit, employee morale suffered. It was as if a large LED stock ticker were installed on every desk, constantly reminding employees that this is the new key indicator that matters above all. It was obvious even among upper management; discussion went from big picture, somewhat ambitious ideas to short-term thinking, centered on how to show good numbers in the next quarter with obvious, incremental adjustments (like pushing more ads rather than developing more interesting products and features).

The funny thing is, the company didn’t actually need the funds raised in the IPO. They had an almost endless supply of interested private investors pouring in money regularly, and the company’s CEO (in private) admitted that they never wanted to do an IPO. It was only necessary in order to appease the expectations of early employees who had been promised a big payday for the shares they were offered instead of competitive salaries. I understand why that was done in the company’s early days, but there ought to be a better way to reward/incentivize early employees that doesn’t rely on the fickle and myopic nature of publicly-traded stock.

Re: In defense of the IPO, and how to improve it

#17

Post by vlovich123 »

TooSmugToFail wrote: post #15
Ericson2314 wrote: post #5

Excellent breakdown with the proper theory. However > In an institutional fundraise, all buyers must get the same price Isn't that the basic problem? Don't we have tons of auction theory on how to not sell all at the same price? presumably that auction theory also properly doesn't confused the varying unit price vs total money raised (it's integral).

I believe this is partly due to long term relationships aspect of the IPO process. During roadshows, underwriters are essentially leveraging their rolodexes. These relationships constitute a significant part of the value they are bringing to the table. If there would be a different price for each investor, some would get a better price than others, and those that got a worse price would not feel very good about it, l…

If they want the most accurate price (doesn’t move much from the initial IPO) a blind second price bidding strategy is useful.

If the company wants the highest price they would do an auction of successively increasing lot sizes.

However, the pool of investors for something like this is small enough that you’d be trying to fight out-of-band collusion. Similarly the underwriters don’t want you to have the highest price. They want the investors to get a price better than the stock is actually worth so that they continue to show up to deals the underwriters organize.

I too think there must be a better way but I suspect you may need some regulation and enforcement of this market to actually see it through.

Re: In defense of the IPO, and how to improve it

#18

Post by vkou »

dperfect wrote: post #16

This makes sense from an investor’s perspective. My objection to IPOs is not so much financial, but more about what it does to a company’s internal culture. Having been at a company that went through an IPO, I saw how that culture shifted - almost overnight. You had employees that once cared about doing their best at their jobs to ones that focused only on how their contributions would affect the public stock perform…

> I understand why that was done in the company’s early days, but there ought to be a better way to reward/incentivize early employees that doesn’t rely on the fickle and myopic nature of publicly-traded stock.

The IPO is the carrot that you're dangling ahead of early employees many years prior to getting to that point.

When you've gotten to a state when you're ready for an IPO, they are expecting to actually get that carrot. You have no leverage or new incentives that you can give to an early employee after you IPO. If they are sticking around after, you're either drowning them in money, or they are doing it as a courtesy.

So, your alternatives are to ask them nicely, or give them a boatload more money to stick around.

> They had an almost endless supply of interested private investors pouring in money regularly

It sounds like they were interested in pouring money in to grow the business, not to reward early employees. (Which is perfectly reasonable.)

This is why you're finding the two things at odds with eachother. As an employee in a pre-IPO company you have a much smaller small amount of leverage for any sweat equity you put in, compared to someone who paid real dollars for their equity. Your interests aren't aligned with your investors, and their interests aren't really aligned with yours, outside of one thing - you both want to get to a point where you can cash out, via IPO.

Re: In defense of the IPO, and how to improve it

#19

Post by dperfect »

vkou wrote: post #18
dperfect wrote: post #16

This makes sense from an investor’s perspective. My objection to IPOs is not so much financial, but more about what it does to a company’s internal culture. Having been at a company that went through an IPO, I saw how that culture shifted - almost overnight. You had employees that once cared about doing their best at their jobs to ones that focused only on how their contributions would affect the public stock perform…

> I understand why that was done in the company’s early days, but there ought to be a better way to reward/incentivize early employees that doesn’t rely on the fickle and myopic nature of publicly-traded stock. The IPO is the carrot that you're dangling ahead of early employees many years prior to getting to that point. When you've gotten to a state when you're ready for an IPO, they are expecting to actually get tha…

> The IPO is the carrot that you're dangling ahead of early employees many years prior to getting to that point.

Yes, that's essentially what I'm saying, but I wonder if there aren't some better alternatives to incentivize early employees when cash is scarce. Maybe (just off the top of my head) something like a contract to pay the employee a set dollar amount (with interest) at an undetermined point in the future, and it must be paid before any profits can be distributed to owners (there could be other triggers as well). This would be in addition to the employee's salary, which is likely to be at below-market levels when the company is still young.

It could come with additional features similar to a vesting schedule, but essentially it would (1) give the employee a known dollar amount of compensation contingent on the company's future success, (2) allow the company to remain private (if desired) while still delivering the "carrot", (3) avoid the need for an option pool, and (4) avoid the issues I described in my earlier comment. After some or all of that amount is paid to an employee, the difficulty in keeping the employee around is no different, but at that point (where profitability allows for the payout), a company is more likely be in a position to offer/renegotiate competitive salaries in the first place.

Then again, a lot of founders/owners probably don't want something so concrete because of course they benefit from being able to attract talented people at a discount by offering a tiny bit of equity and the dream of becoming a millionaire when the company IPOs or gets acquired. Heck, I've been there - on both sides of the conversation. But the truth is, a lot of people are realizing that equity isn't usually worth what a founder thinks it is, so that's becoming a less effective bargaining chip as time goes on.

Re: In defense of the IPO, and how to improve it

#20

Post by rebase-vc »

the much bigger problem than pricing is timing. retail investors don't get a chance to buy in until the company is already valued at $1-$10B because institutional investors hoard all of those gains.

the other issue is VCs using public markets as a dumping grounds for shi... I mean not so great companies like blue apron or lendingclub, and leaving retail holding the bag.

software is eating the world and capitalism is eating itself. i say this as someone that has benefited from software and capitalism but also knows that the system is extremely flawed

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