With the markets hitting new highs, investors and funds are no longer content with getting >15% return YTD. One would have given his left arm to get that kind of return just a decade ago but to quote Bob Dylan – “The times, they are a changing”. Now, there is this frenzy to get in on the next IPO that would give these investors better than S&P 500 returns.
And so, we have dubious businesses like Beyond Meat that has soared over 400%. But, for every startup that has made to Initial Public Offering (IPO), there are 9 other startups that go under. And, even among the successful IPOs, there are many whose stock never reaches the first day closing price. Guess you can’t call them successful anymore. And so, the hit rate is pretty poor.
One would think the execs in these IPO companies made a killing and should be plenty happy. But, that is not necessarily the case. Most CEOs dread seeing their shares soar on the first day of day of trading because now, they have to match the feverish insanity of the first day with numbers that justify that kind of valuation of the company.
Future Wealth’s View
The problem with greed is that it is never good. Gordan Gekko may disagree but that is the reality of life. When Etsy’s share soared 94% on its first day of trading, its CEO was not smiling. He was soon kicked out ‘coz the company never met the expectations that was set by Wall Street. He would argue that it was never intended to be a “darling” of Wall Street and was simply raising money to grow its business. But, that is the reality of life in Wall Street. And, there are several more where that came from.
The impact of failing IPO has severe reactions on the company and its investors that many simply don’t realize. Firstly, most retail investors never talk about their losses and only try to highlight their successful stock picks. It is a kind of self defense mechanism. The next level gets a bit more insidious. The funds who get burnt, dump the stock and end up closing the fund having lost investors’ money. In another dimension, an activist shareholder jumps in and takes over the company and runs it into the ground summarily dismissing hundreds and thousands of employees. It gets even worse. The newly appointed CEO can barely take a bathroom break before the board of directors ask for an updated performance report. Some CEOs simply decimate – a CEO of Health Food Company developed an opioid addiction, another CEO of a Beauty brand company got into heavy drug use and fell off his 32nd floor condo. Others are summarily dismissed and leave giving the most popular reason for getting fired – “They are leaving to spend time with the family”.
And so, we ask ourselves, is it worth chasing the next IPO or is it better to invest in companies that have a proven track record of solid returns to shareholders? You be the judge.