Going Public, Demystified (an encore presentation)
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 quite diverse personal and professional backgrounds. The paths that have brought people into our universe are quite varied. So, while we would be happy to know that you have valued the experience of learning more about companies like Palantir, SoFi, Impossible Foods, SpaceX, and many more exciting private innovators, 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 will 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, the company becomes a “unicorn” — a rare, magical beast that can make your wishes come true. That’s when name recognition and the interest of a broader range of potential investors really begin to perk up. It’s also when your friends at Iron Edge VC put a sharper focus on it, and perhaps start composing highly informative and mildly amusing newsletters 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 Stanley and Goldman Sachs). 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 platform like the New York Stock Exchange or the NASDAQ to much extravagant fanfare. Then it simply keeps trading day after day from that point, like Nike, Disney, Google, and more than 600,000 other companies around the globe.
After an IPO, insider shareholders are restricted from selling their shares for an average of 180 days. This insider lockup period is designed to prevent excessive supply from negatively affecting the stock price. In most cases, company insiders acquire their shares in the years before an IPO at much lower valuations. The temptation to lock in a juicy profit at the expense of a newborn public listing’s ticker might be too much to resist. The lockup period safeguards against such undue immediate selling pressure.
A rarer method of going public is called a Direct Listing, also known as a Direct Public Offering, or DPO. 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 DPO lacks the safety net of the underwriter’s attention and the financial support garnered from a roadshow, it is a significantly less expensive process. It is also is free from the insider lockup period — insider shareholders are permitted to liquidate their positions on Day 1, thereby providing the supply that would have otherwise come from an IPO’s underwriter. In April 2018, Spotify (NYSE: SPOT) was a company with high visibility that successfully conducted a Direct Listing, its first trade ticking at $165.90, well above expectations. More recently, in June 2019, Slack Technologies (NYSE: WORK) took the DPO route as well.
With that foundation, please consider what Iron Edge does. We are a late-stage private equity investment fund. We ordinarily 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 DPO, but that’s a meaningful contributor to buying them at much lower prices. It’s why several investors bought Spotify at $82 – $137 (adjusted for a 40-for-1 stock split) and sold shortly after the Direct Listing above $180, and in some cases over $250. Uber had a bit of bad press surrounding its IPO, but our investors who got in below $30 were smiling when the stock found its way to the mid-40’s. Lyft pre-IPO investors who bought between $23 and $24 had even more reason to celebrate when the public issue traded in the high 70’s. Iron Edge VC clients who purchased Pinterest at a split-adjusted $21 have recently seen the now-public company trading north of $37.
Of course, not all investments are grand slams, and each one of them involves risk. At Iron Edge VC, 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 generally kept under wraps. For those wishing to perform due diligence, numbers can be estimated by a variety of services that sleuth around a private business’s financing rounds and other fiscal clues. A private company is also 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” 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, Mark Zuckerberg had “no plans” of bringing Facebook public. Then, a mere five months later, Facebook was logging massive volume on the NASDAQ.
For many years, Palantir Technologies, Inc. CEO Alex Karp seemed to delight in keeping us all in suspense about when they might go public. Depending on the timing, Karp’s interviews on CNBC would either provide great hope for a public market debut or give insider shareholders reason to fret that the wait might be unbearably long. We chronicled this drama through a series of “Investor Alerts” that you might recall seeing in your inbox from time to time, along with commentary about the fundamental workings of the big data enterprise. Last May, Karp’s signals became clearer during an interview on HBO’s Axios, in which the enigmatic leader responded to a question about Palantir going public within a year with “I suspect that would be true”. As noncommittal as that may sound to many, that statement qualifies as a brash declaration of certainty in private company executive vernacular. Early last month, Palantir filed a confidential SEC Form S-1, confirming its plans to go public. Finally, last week, Bloomberg reported that shares in the company will made available through a DPO late next month. Angel investors, company employees, and Iron Edge VC visionaries rejoiced, knowing that Palantir’s payoff is on the near horizon, and without a six-month lockup period, to boot.
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.
As always, shares are available on a first come, first served basis.