A theory about the current IPO market

As expected, shares of Poshmark exploded this morning, blasting over 130% higher in afternoon trading from the company’s above-range IPO price of $42. The enormous and noisy debut of Poshmark comes a day after Affirm, another IPO, was treated similarly by the public markets.

Both explosive debuts were preceded by huge December debuts from C3.ai, Doordash and Airbnb. It seems today that any venture-backed company that can claim some sort of tech mantle is being treated to a strong IPO pricing run and a huge first-day result.

This is, of course, annoying to some people. Namely, certain elements of the venture capital community who would prefer to keep all outsized gains in their own pockets. But, no matter. You might be wondering what is going on. Let’s talk about it.

Here’s how you get a big first-day IPO pop

TechCrunch has covered the IPO window as closely as we can over the last few years. And the late-stage venture capital markets, along with the changing value of tech stocks and the huge boom in consumer (retail) investing.

Based on my participation in as much of that reporting as I could take part in here’s how you get a 130% first-day IPO pop in a company that has actually been around long enough for investors to math-out reasonable growth and profit expectations for the future:

  1. Exist in a climate of near-zero interest rates. This leads to super-cheap money, bonds being shit and no one wanting to hold cash. Lots of dollars go into more speculative assets, like stocks. And lots of money goes into exotic investments, like venture capital funds.
  2. Invest huge amounts of money into startups. This is easy to do as we already know there is a lot of money being made available to the VC class.
  3. Keep companies private longer. As VCs are loaded, they can afford to fund startups for longer periods of time and to the tune of more total money. This allows upstarts to build more brand pre-IPO, boosting demand amongst public investors for shares before they list.
  4. Exist in a climate of rising retail demand. Robinhood and its competitors have taken the world of discount brokers and discounted them further. Now it costs nothing to invest. This helped engender the boom in retail trading that we’ve heard so much about. The result of that boom is more possible hands reaching for the shares of companies going public that are not able to get allocation in the offering itself.
  5. Exist in a climate of YOLO, meme stocks and general stupidity. This is not a knock against Robinhood, but instead is a diss of my fellow humans who do silly things on purpose.
  6. Exist in a world where COVID-19 wrecked many industries and generally boosted technology companies. The summer trade last year was to rotate out of nearly everything and into tech stocks. Software was the way forward! And so long as the economy’s digital transformation was accelerating, the market for software felt unlimited. Valuations rose. This created fertile ground for tech offerings.
  7. Bring some big-name companies to market.
  8. Watch pent-up demand, huge retail interest, lots of bored money, big startup brands, stupid humans and a general market bias toward tech as the way to buy growth and thus capital returns, go bonkers.

The result of all of this, so far as I can tell, is that many companies are managing to price their IPOs at levels that would have seemed confiscatory a few year ago. Then they start to trade and promptly double, as retail scrambles to get shares, and those lucky enough to have managed to get IPO allocation hold, expecting huge gains.

Lots of demand, little supply, boom goes the price.

None of this says that Affirm is really worth $87 trillion or whatever, or that Poshmark is really worth over $130 per share. But it does help explain a bit of just why everything feels so damn silly this year.