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Going Public, Demystified

To Our Valued Investors:

If you have been a loyal reader of Iron Edge’s company updates, we thank you, and we sincerely hope that you have been enjoying what we put out there every week. Our goal is to inform you about the finer points of the private companies to which we offer access, and to raise interest in and awareness of the pre-IPO market.

As the Iron Edge community continues to expand, we have come to learn that our accredited investors and our accredited potential investors have very diverse personal and professional backgrounds. The paths that have brought people into our audience are quite varied. So, while we would be happy to know that you have valued the experience of learning more about companies like Palantir, SpaceX, Topgolf, SoFi, and many more, we recognize that you might not fully understand what we offer at Iron Edge. With that in mind, today we would like to cover the basics.

When an enterprise is just starting out, public awareness of the business and general understanding of its operations are, naturally, quite low. If the company has a great business model and it’s adept at making things work, it would typically try to solicit private funding. This money comes from well-capitalized investors who specialize in the risky yet potentially lucrative practice of early-stage financing. As the company grows and begins to produce meaningful revenue, it attracts more of these early-stage venture capital professionals into subsequent funding rounds. When the firm’s valuation crosses the $1 billion-mark, clever market observers begin referring to it as a “unicorn”, and that’s when public awareness and interest really begin to perk up. It’s also when your friends at Iron Edge put a sharper focus on it, and perhaps start composing an email to tell you about it.

After some years of maturing, the company might decide that it’s time to “go public”, or, to make its shares available for everybody in the free world to buy. The most common way of doing this is through an Initial Public Offering, or IPO. The IPO process starts with the selection of an underwriter (think names like Morgan and Goldman). The underwriter assists with the creation of brand-new shares in the company, and then takes those shares on a “roadshow”, selling the company’s equity to mutual funds, broker-dealers, insurance companies, and other investment banks. Then, the underwriter helps set a price for the soon-to-be-public stock. On the appointed day, the company debuts on a public platform like the New York Stock Exchange or the NASDAQ to much extravagant fanfare, and then… it simply keeps trading day after day from then on, like Ford and Disney and Microsoft.

An exception, and a rarer method of going public, is called a Direct Listing. This is when no underwriter is hired, no new shares are issued, and the company sells already-established shares to the public, magically transforming those shares into publicly traded securities. Although a Direct Listing lacks the safety net of the underwriter’s attention and the support garnered from a roadshow, it is a significantly less expensive process and it is free from the six-month “insider lockup” period that follows an IPO. In April 2018, Spotify was a company with high visibility that successfully conducted a Direct Listing, its first trade ticking at $165.90, well above expectations.

With that foundation, please consider what Iron Edge does. We are a late-stage private equity investment fund. As earlier implied, we do not become involved in those riskier initial financing rounds, but we jump in when there is a higher name recognition. It is worthwhile to note that our sales of private shares often take place years before an IPO (or Direct Listing), but that’s a meaningful contributor to buying them at much lower prices. It’s why several investors bought Spotify at (stock split adjusted) $82 – $137 and sold shortly after the Direct Listing above $180, in some cases at nearly $200. Uber had a bit of bad press surrounding its IPO, but our investors who got in below $30 are still smiling because it’s now in the mid-40’s. Lyft pre-IPO investors who bought between $23 and $24 have even more reason to celebrate as they watch the public issue approaching $70.

Of course, not all investments are grand slams, and each one of them involves risk. At Iron Edge, though, our goal is to identify great pre-IPO opportunities and make them available to a well-informed clientele.

Private companies enjoy a level of secrecy not available to those that are publicly traded. Listed companies are required to issue financial reports on a quarterly basis, but the economics of pre-IPOs are estimated by services that sleuth around the financing rounds and other fiscal clues. And, importantly, a private company is under no obligation to let you know their long-term plans regarding anything, including the prospect of an IPO. If a CEO gives a hint by dropping a phrase like “within the next year” on CNBC that is, of course, a great sign. But don’t despair, and don’t let it be a deciding factor not to invest, if the big boss utters the dreaded “no plans”. In December 2011, Zuckerberg had “no plans” of bringing Facebook public. Then, a mere five months later, there it was on the NASDAQ.

Palantir CEO Alex Karp seems to delight in keeping us all in suspense about when they might go public, but we suspect that the internal pressure is mounting. You wanna know why? Check out these absurd Palo Alto real estate listings from Zillow. If you require more than two bedrooms, you will need to fork over more than two million dollars. And if you can’t afford to live there, you can’t work there. So picture the Palantir coder, loaded with equity that will someday be worth a fortune, but currently he’s worried about low cash reserves. Meanwhile, his buddies at Pinterest are already rolling in it, and buying those expensive houses, after their IPO. Palantir is utterly dependent on talent retention, not only due to the high level of specialized training of the best and the brightest but also because of the security clearances required of Palantir. They regularly manage highly classified information that belongs to the federal government, so each employee is truly a meaningful investment of time and money. They can’t afford to watch their programmers run for the exits! A nice, juicy IPO (or better yet, a Direct Listing), would go a long way toward keeping them in their seats.

We at Iron Edge VC are proud to have access to a wide variety of private companies’ shares before they go public. If you would like to learn more, or if you know of anybody else who would, please do not hesitate to contact us by clicking “Get in Touch” below.

As always, shares are available on a first come, first served basis.

All Our Best,

Paul Maguire, Managing Partner and The Iron Edge Team

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Paul Maguire

Founder And Managing Partner