(IPO) pops and drops

The most recent edition of my newsletter went out this Sunday, and I got a comment on this section:

Consumer finance company Hudya Group listed on Nasdaq First North. The share price has fallen since then, and while the story talks about this as a clear negative it could be argued otherwise too (the opposite would be leaving money on the table). Too early to say what’s correct in this specific case though. Link

The comment was that I was surprisingly mild towards the company, Hudya, as they appeared to have had a very unsuccessful listing. There are a few aspects here that I wanted to comment on.

First, I want to clarify that my comment was not directed at the company. I have never met Hudya, and have no opinion whatsoever on the quality nor the real value of the company. Generally, I try not to pass judgment on any of the startups mentioned in my newsletter - that’s the job of journalists. My job as an investor is to support companies, and I’m not contributing positively by publicly pointing out flaws from afar.

Instead, I was addressing a general issue: the prevalent view that an “IPO-pop”, that the share price appreciates immediately after listing, is the only desired outcome for a company going public.

An IPO-pop basically means that a company left money on the table. It issued shares at a price lower than what the market was willing to pay, at the expense of current shareholders who take on extra dilution. Slack and Spotify both avoided this dynamic when they recently went public, as they did what is called a direct listing - and I’m not the only one believing this will evolve into the new standard going forward.

It was this perception, that an IPO-pop is not necessarily the best outcome, I was trying to address with my newsletter comment.

Another interesting question is what an unsuccessful listing is? Because the answer depends on how long you hold the stock acquired. If you invested in Facebook when they listed, you would have earned almost 6x your investment today. But if you sold after 115 days, you would’ve lost about half of your investment. Amazon would’ve given you a return of 1250x if you held on to the share until today, but only 3.5 if you held onto the shares for 4.5 years. You get my point: unless you have sold your shares it’s hard to conclude on the quality of any investment.

That said, every company considering to go public should feel a degree of responsibility towards investors, employees as well as other founders. It is said that good companies open (IPO) windows, while bad companies close them. If the share price of your company drops and continues to struggle after you list, it can have broad implications.

All else equal, poor share performance makes investors less likely to invest in the next company wanting to go public. It can also affect the psychology of your own company. Employees who’ve been told they’re part of an exciting journey can suddenly monitor the market’s take on this journey, and when things are going south and their stock options go out of the money, the mood tend to shift negatively.

Better make sure your company is quite robust before exposing your company to the scrutiny of public markets.