from Hacker News

In defense of the IPO, and how to improve it

by naftaliharris on 8/28/20, 10:52 PM with 21 comments

  • by Ericson2314 on 8/29/20, 2:16 AM

    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).

  • by actuator on 8/29/20, 1:18 AM

    Interesting points they are making, it would be interesting to see how much of the IPO volume gets sold out in the first week or month to see how much of the price is being driven by just a few shares.

    I looked at Zoom's IPO, the trade volume on IPO day was around 26M with closing price of 62. If for simplicity we disregard the same shares being traded(trading strategies, HFT trades). This is about $1.5 B in volume, they raised $0.36 B in IPO. So, the point that the article makes about the value being driven by just a small set of "gamblers" and not the value of the whole/majority of IPO block probably needs to be looked at with data.

    Is there any way to determine the big institutional trades on a particular day to see if any of the IPO subscribers ended up selling in the first few days of listing?

  • by satya71 on 8/29/20, 2:33 AM

    I've read countless articles on IPOs. This is the first time I appreciated the mechanics and economics. Excellent article.

  • by dperfect on 8/29/20, 3:19 PM

    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.

  • by fossuser on 8/29/20, 4:09 AM

    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 really bad way to go public unless you’re someone like Nikola where your company is basically a fraud ripping off the SPAC, in that case probably a good way to go for the founder.

    I’m still skeptical of the a16z arguments defending the IPO pop. When you have banks doing lots of transactions and founders doing only one or two the transactions will likely be skewed to benefit the banks along with a really compelling narrative of why they’re not.

    The simpler answer seems more likely here, I think Matt Levine is probably more correct.

    https://www.bloomberg.com/opinion/articles/2020-08-06/it-s-a...

  • by fadesibert on 8/29/20, 1:31 AM

    Excellent article - goes into some detail on the myth of oversubscription (well, inflation of reality)

  • by rebase-vc on 8/31/20, 12:36 PM

    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

  • by joschmo on 8/29/20, 12:54 AM

    This is a breath of fresh air in comparison to HN's typical ignorance on IPOs. I can see why it wouldn't be popular here.

    A mix of the theoretical grounding of the activity with the on-the-ground realities of filling up a book and mechanics of how it happens. The IPO isn't perfect, and is in need of a software-defined overhaul, but does have clear value. We'll see if Carta's Xchange product can live up those goals.