The technology is moving at warp speed during the coronavirus pandemic, but the IPO process is stuck in place.
During a second straight week, a tech company more than doubled in value after its stock market debut. Last week it was Chinese cloud software developer Agora, which increased 150% during its first trading day on Nasdaq. And on Thursday, insurance technology company Lemonade jumped 139%.
Technical IPOs have long been criticized for a process that allows investment banks to hand over-priced shares to large public money managers, who often have immediate and massive pops before ordinary investors can participate. At the same time, the issuing company ends up collecting much less money than it could.
Over the past four months, with face-to-face meetings from the table, IPO roadshows have gone virtual. Management teams, with the help of bankers, sell their story over Zoom rather than spending two weeks traveling to the money in New York, Boston, Baltimore and San Francisco.
While they can save money on travel, they still leave piles of cash on the table. Lemonade sold 1
“They ignore demand when pricing. Intentionally,” venture capitalist Bill Gurley of Benchmark said in a text message. “This problem is systematic. Because the system is broken.”
Gurley, who has been among the toughest IPO skeptics, posted a similar tweet after Agora’s IPO, expressing surprise “that there is an economic exercise on this planet involving hundreds of millions of dollars where it is OK not to even get to 50% of the real end results. “
A Lemonade spokesman declined to comment, and an Agora representative did not respond to a request for comment.
In a video interview last week after Agora’s IPO, CEO Tony Zhao told CNBC that “the roadshow went well” and that he received good feedback from 30 to 40 different investment groups. Zhao attended meetings from China while Chief Operating Officer Reggie Yativ joined from Silicon Valley, where the company also has a large presence.
“They encouraged us to stay focused on long-term things and said they appreciate our strategy,” Zhao said.
Agora’s software runs communication systems and allows developers to easily embed video or voice tools into their applications. Revenue nearly tripled in the first quarter to $ 35.6 million, as demand rose from customers managing a Covid-related peak in online communications.
Agora collected approximately $ 350 million in its IPO for shares that were worth over $ 880 million at the end of the first trading day. The stock rose from its stock price of $ 20 to $ 50.50 on the first day and closed Thursday’s session at $ 56.49.
“At the macro level, you have a huge amount of optimism about the future of technology,” says Glenn Solomon, a partner at venture capital firm GGV Capital, which is an investor in Agora. “At the micro level, it’s a challenge. You have bankers trying to price deals based on some reasonable valuation multiple while the market pays for new names and growth.”
Solomon, who offered his views via text, said he agreed with Gurley on the need for a “better system where the market can price quotes more effectively.” Gurley has tried to get companies to follow Spotify and Slack to conduct direct quotes, which allows existing investors to sell shares at market prices.
Lemonade priced its IPO to $ 29, having previously increased the range to $ 26 to $ 28 from $ 23 to $ 26. Still, the debut price valued the company at $ 1.6 billion, under a private market valuation of about $ 2 billion last year.
Lemonade’s revenues more than doubled in the first quarter to $ 26.2 million, partly because consumers are at home, the company is set up to automate the insurance buying experience and to allow the company’s representatives to write insurance plans remotely. Lemonade has artificial intelligence robots named AI Maya and AI Jim to handle customer calls and claims.
“Our customers’ experience with Lemonade is also largely affected by the unrest, as AI Maya and AI Jim chat with customers, no matter where they are, without triggering concerns about social distance,” the company said in its prospectus.
“Uncertainty always gives a discount”
Matt Oguz, an investor in Lemonade, was not involved in pricing the deal or the roadshow, although he said the process was moving “very fast” and that there was a lot of new investment interest. Raising over $ 300 million at a time of economic and financial turmoil is a significant achievement, he said, even though pricing was not in target.
“Uncertainty always gives you a discount,” said Oguz, a partner at Venture Science. “On the one hand, you get a lot of money up front. On the other hand, if a pop like this happens, you might leave money on the table.”
There’s more to the story than the first day of pop, said Lise Buyer, co-founder of the Class V Group, which helps start-ups as they prepare to go public. This can happen well in the following months, which can make the stock move much higher or lower.
While the buyer acknowledges that “too many companies seem to leave too much on the table,” she said there are other factors that go into pricing, including management’s efforts to account for employee morale and potential risks to the business.
“Just because a stock can trade in a shady, volatile market that we have now, does not mean the top price is sustainable,” the buyer said in an email. “Since management teams must be accountable to their employees, they often choose to price at a value that the basic factors support as opposed to the price the market wants today to pay. . “
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