Tech companies’ initial public offerings (IPOs) can be grossly mispriced, as evidenced by some companies like Lemonade and Agora which have leapt up close to or even more than 150 percent in price after going public, CNBC reports.
The problem, according to venture capitalist Bill Gurley of Benchmark, quoted by CNBC, is the system.
“They are ignoring demand when they price. On purpose,” he wrote in a text message, according to CNBC. “This problem is systematic. Because the system is broken.”
What happens with tech IPOs is that investment bankers often hand over the underpriced stock to larger public money managers, who take advantage of immediate and giant-sized pops before other, smaller managers are able to participate. The issuing company, as a result, ends up making less money than it could have.
In the example of Lemonade, the company sold 11 million shares for $29 a piece. That netted it $300 million, with the investors getting a $444 million difference based on the closing price of $69.41. Lemonade’s cash and cash equivalents were around $567 million before the IPO — a big difference, CNBC reports.
Agora had a similar story, raising around $350 million in its IPO for shares that ended up being worth over $880 million by the end of trading, the stock price going from $20 to $50.50 on the first day.
In response to that IPO, Gurley Tweeted his exasperation “that there is a financial exercise on this planet involving hundreds of millions of dollars where its OK to not even get to 50% of the actual end result.”
Class V Group co-founder Lise Buyer told CNBC that it could be more complicated than just the first-day pop. She said it could also mean a higher price isn’t sustainable.
“As management teams have to be responsible to their employee base, they often choose to price to a value the fundamentals support as opposed to the price the market wants to pay today,” she said, according to CNBC. “One can really only tell if a deal was seriously mispriced if it maintains the opening trade price several months later.”