Technology is moving at high speed during the coronavirus pandemic, but the IPO process is stagnant.
For the second week in a row, a technology company has more than doubled its value in its stock market debut. Last week, it was Chinese cloud software developer Agora, which increased 150% on its first day of listing on the Nasdaq. And on Thursday, the insurance and technology company Lemonade increased 139%.
Technology IPOs have long been criticized for a process that allows investment bankers to deliver low-priced stocks to large public money managers, who often enjoy immediate and massive bursts before ordinary investors can participate. Meanwhile, the issuing company ends up raising far less money than it could.
In the past four months, with face-to-face meetings off the table, IPO roadshows have gone virtual. Management teams, with the help of the bankers, are selling their story through Zoom instead of spending two weeks traveling to the money centers of New York, Boston, Baltimore and San Francisco.
While they may be saving money on travel, they still leave piles of cash on the table. Lemonade sold 11 million shares at $ 29 a piece, bringing in just over $ 300 million and giving new investors the difference of $ 444 million, based on the closing price of $ 69.41. That’s a big problem for a company that had cash and cash equivalents of approximately $ 567 million before the IPO.
“They are ignoring demand when they are priced. By the way,” 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 loudest IPO skeptics, posted a tweet with a similar theme after Agora’s IPO, expressing amazement “that there is a financial exercise on this planet involving hundreds of millions of dollars where it is okay neither not even reach 50% of the actual end result. “
A Lemonade spokesperson 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 comments from 30 to 40 different investor groups. Zhao participated in meetings in China, while COO Reggie Yativ joined from Silicon Valley, where the company also has a large presence.
“They encouraged us to stay focused on things for the long term and said they appreciate our strategy,” said Zhao.
Agora’s software powers communications systems and enables developers to easily integrate video or voice tools into their applications. Revenue nearly tripled in the first quarter to $ 35.6 million, as demand skyrocketed from customers facing a Covid-related increase in online communications.
Agora raised around $ 350 million in its IPO for shares that, at the end of the first day of trading, were worth more than $ 880 million. The stock rose from its IPO price from $ 20 to $ 50.50 on the first day, and closed Thursday’s session at $ 56.49.
“On a macro level, you have a tremendous amount of optimism about the future of technology,” said Glenn Solomon, a partner at venture firm GGV Capital, which is an investor in Agora. “At the micro level, it is a challenge. There are bankers trying to price the deals based on multiple reasonable valuations while the market is paying for new names and growth.”
Solomon, who offered his views via text message, said he agrees with Gurley on the need for a “better system where the market can price IPOs more efficiently.” Gurley has been trying to get companies to follow Spotify and Slack in the search for direct listings, allowing existing investors to sell shares at a market clearing price.
Lemonade set the price of its IPO at $ 29, after previously increasing the range to $ 26 to $ 28 from $ 23 to $ 26. Still, the debut price valued the company at $ 1.6 billion, for below a private market valuation of approximately $ 2 billion last year.
Lemonade revenue more than doubled in the first quarter to $ 26.2 million, in part because, with consumers stuck at home, the company is set up to automate the insurance buying experience and allow company reps to write plans. insurance remotely. Lemonade has artificial intelligence robots called AI Maya and AI Jim to handle customer calls and complaints.
“Our clients’ experience with Lemonade is also not greatly affected by the turmoil, as AI Maya and AI Jim chat with clients, wherever they may be, without raising concerns about social estrangement,” the company said in your prospect.
‘Uncertainty always brings a discount’
Matt Oguz, an investor in Lemonade, was not involved with the deal price or the roadshow, although he said the process moved “very quickly” and that there was a lot of interest from new investors. Raising more than $ 300 million in a time of economic and financial turmoil is a significant feat, he said, even if the price was not on target.
“Uncertainty always brings a discount,” said Oguz, who is a partner at Venture Science. “On the one hand, you get a lot of money up front. On the other hand, if a bang like this occurs, then you may be leaving money on the table.”
There’s more to the story than first-day pop, said Lise Buyer, co-founder of Class V Group, which helps startups as they prepare to go public. Many things can happen in the following months that can make the stock rise or fall a lot.
While the Buyer acknowledges that “too many companies seem to be leaving too much on the table,” he said there are other factors involved in pricing, including management’s effort to account for employee morale and the potential risks to the business.
“Just because a stock can trade in a frothy and volatile market that we have now does not mean that the maximum price is sustainable,” Buyer said in an email. “Because management teams have to be responsible to their employee base, they often choose to put a price on the value that the fundamentals support compared to the price that the market wants to pay today. One can only know if a deal was seriously undervalued if you keep the opening trade price several months later. “
CLOCK: Direct listing is a ‘smarter approach’
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