There was a time in this country when beer tasted like swill, Donald Trump only threatened to run for President, and tech IPO’s were rocket rides to the financial moon.
Now we have arguably the best beer in the world (good), The Coiffed One is actually running for President (yet to be determined, but probably bad), and tech IPO’s are dead money (definitely bad).
For me to write these words is almost incomprehensible given the incredible history of the tech IPO.
There are men out there to this day, on their third former nanny new wife, whose only problem in the world is deciding between the lobster and the cracked crab for lunch because they attached themselves to the right IPO in the 80’s.
In order to understand the tech IPO’s fall from grace, you first have to understand how the landscape of capital flow has changed in the last 20 years.
The original purpose of an IPO was to give up and coming companies access to public capital – on a scale not easily available in the private world – in order to grow their business. In essence, IPO’s were the first form of crowdfunding, raising money from thousands, if not millions, of individuals through share ownership.
Because of this, companies usually IPO’d relatively early in their growth cycle. Take for example, Microsoft, which first went public in 1986 when their revenues were $196M (about $425M in today’s dollars) and they had 1,442 employees.
Not a small company by any means, but certainly not a monster.
Five years later they had revenues of $1.8B and 8,226 employees – a gain of over 900% and 500% respectively.
Five years more down the line and they were coming in at $8.6B – 4300% higher than when they went public 10 years earlier.
So, if you were an investor in their IPO, and held, you would have seen an exceptional return on your investment.
But nowadays, things are different.
Access to private capital has expanded on a scale that most would never have imagined. And money always seeks the best return, even if it takes it a while to figure out where that return is. Thus, capital has naturally gone downstream to early stage tech – which should be a surprise to no one.
By the way, I make no value judgement on this phenomenon. It’s neither right or wrong, it’s just the way it is.
This early access to capital means that the majority of growth in tech companies previously seen post-IPO, is now taking place in private.
And when a company like Square goes public, it’s a liquidity event for private money, not a growth opportunity for retail investors like it once would have been.
Sure, you will still see a lot of hype on opening days, with bullish reports of shares of XYZ Company rising X% over their offering price, because it’s in Wall Street’s best interests to keep the air of opportunity wafting around the IPO market. The more shares they place the more they can justify their underwriting fees. They want you to keep thinking that Debbie Gibson is ruling the charts instead of Adele.
But in reality, most tech IPO’s will disappoint because they are too far down the road to grow at a rate high enough to justify their share price.
Even the most notable exception, Facebook, can’t keep up the pace of old school tech IPO’s.
When Facebook went IPO in 2012, their stock price was $38/share, giving them a market cap of $104B. Three and a half years later they trade at $107.32 with a market cap of $304B – about 300% growth since IPO’ing.
This is nothing to sneeze at, but will their stock price go on the same type of tear that that Microsoft – or any number of 80’s/90’s tech IPO’s – did back in the day? Will they be a $900B company in a year and a half, because that is the number they will have to hit in order to match Microsoft’s growth.
And Facebook is the gold standard of tech IPO’s. The only other company in their league yet to got public is Uber, which credible reports suggest might have as high as a $100B valuation by the time you and I can buy it.
The fact is, most tech IPO’s going forward are going to be busts – at least relative to how they used to perform – a trend that is already taking place.
So what is your takeaway?
In 1975, Paul Stanley, of the band KISS, is heard in the interstitials between songs on KISS Alive, addressing the crowd, and telling them that backstage, before the concert, somebody told him that the people in the audience liked Rock n’ Roll.
In 1996, I fulfilled one of my childhood dreams by seeing KISS in concert on their reunion tour. And on the night that I saw them, Paul Stanley, of the band KISS, told us that backstage, before the concert, somebody told him that the people in the audience liked Rock n’ Roll.
Point is, automaton-like behavior might work for venerable rock bands, but it won’t cut it in the market.
Times change, markets change, and you have to evolve with them if you want to be effective in your investing. You can’t just blindly buy a tech IPO and expect it to take you up a few tax brackets like it once did. No matter how much you like Rock n’ Roll.