The IPO Market Fails To Die

Technology IPOs, written off for the year just months ago, are back. And back in style.

Both Square and Match Group posted incredibly solid first-day results today. You can’t knock that. All sarcastic tweets aside, the firms priced at a point that allowed each a nice pop. That’s how you build a damn narrative.

A few raw results:

  • Match Group: Priced at $12, ended its first day of trading at $14.74. That’s up 22.83 percent. That’s a valuation of $3.5 billion.
  • Square: Priced at $9, ended its first day of trading at $13.07. That’s up 45.22 percent. That’s a valuation of around $4.2 billion.

Now, to the negatives. Keep in mind for the next section that both companies pulled off an IPO and strong first days. That’s amazingly hard. Comically hard. Not-to-be-knocked hard. So let’s unpack it.

Down First, Then Up

When a company goes public, a moderate pop is desired. That’s what I have learned from both by watching the technology market, and chatting with CEOs either going public, or that have already crossed that particular chasm.

But, there is a balance. You don’t want to leave money on the table, and you also do not, and we can repeat this, fall on your first day of trading. Narratives matter. For context, I give you Levie:

How do you price animal spirits? By committee, it seems, and then auction house. I think it’s fair to say that if you price below your original range, it isn’t the best of signs. We know that is true, because, in reverse, when a company prices above their initially proposed range, it is considered to be a strong sign.

Moving ahead, when you estimate your price range conservatively, and then fail to break out of your initial range when you formally price, it’s not that great of a sign. A company can, of course, set its range low on purpose, so that when it does price at last, it lands ahead of that range, making it look stronger, even though the result was at least partially artificial.

Box did that. From TechCrunch’s previous coverage:

The $11 to $13 price band values the company at more than $1.5 billion. That’s a sharp decline from its last private valuation of around $2.4 billion. So is Box making a mistake, or leaving too much money on the table? I don’t think so.

Box later priced at $14 per share, ahead of its proposed range. Hortonworks and New Relic are two other cases of the same from recent days. So, you can win at that game.

Or not, in the case of Square, which appears to embody the third worst of all possible situations. It proposed a price range that was initially called conservative, and then set its final price dramatically below that range. All that was followed by a strong first day. So, it brought in less capital than it might have — something it certainly needs — and did so during a process that hurt its reputation at least some, only to perform strongly in its opening day.

The second and first worst outcomes that Square did avoid, of course, are being flat after under-pricing, and, under-pricing and then falling all the same.

It’s easy to be a critic. It’s easy to write a blog post. It’s easy to not build companies. It’s easy to not do hard things. I know that.

At the same time, I do not think that we should consider the above IPOs to be complete successes. They were strong in the sense that they hit their amended goals. That’s to be credited.

But let’s not forget that a caveat is not a sin.