Here’s What You Need To Know About IPOs and Private Shares

large-1411068823Phil Haslett is the co-founder of EquityZen. At EquityZen he’s reinventing the marketplace for private shares. If you own stock in a private company and want to sell those shares, go to talk to Haslett and his team. Because of his experience in private shares and pre-IPO companies, we reached out to Haslett. We wanted to learn more about what he sees in the market and how that can help other traders and investors. So before you buy the next big IPO, read this quick talk:

1.What would you tell all new investors and traders to look for in IPOs?

For tech IPOs, I’d say a few factors are really important:

  • Revenue growth – is this a company that is continuing to grow, even at the $100 million or $200 million-per-year revenue mark?
  • Margin expansion – can the company demonstrate a path to profitability? Or are they spending $2 in sales and marketing for every $1 in revenue (a bad sign)?
  • Pedigree of Venture Capital investors – what’s the track record of the company’s major investors? In the VC space, it’s known that a select group of firms (10-20 of them) generate a bulk of the asset class’s returns. They can be leading indicators for a winner.
  • Bankers – who’s bringing the deal to market? Look for top-tier investment banks running the deal, rather than smaller boutique banks that have less experience taking companies public.

2. What do you think is one of the most misunderstood aspects about IPOs?

The lock-up. In the first 180 days of a company being public, something like 70-80% of shares outstanding are actually restricted from trading, so the “float” is actually only 20-30% of the full share count. What does that mean for retail investors? VOLATILITY. Lots of it. With so few shares exchanging hands, a great (or terrible) first earnings report can lead to extreme stock price moves. Those first 6 months of trading can be really bumpy, and traders should keep this in mind: getting in (and out) of positions may not be as easy as they think

3. How is the private market changing IPOs?

Well, it’s taking a lot of tech investment opportunities away from retail investors. Amazon went public in at a $438 million valuation in 1997 (http://www.cnet.com/news/amazon-com-ipo-skyrockets/). That day, a retail investor could be part of their incredible growth (current market cap: $355B). Now we have 169 so-called “Unicorns”, or private tech companies worth $1 billion+.

Essentially, a handful of institutions are now providing capital to these tech companies, rather than the public markets. And that’s impacting the portfolios of retail investors that no longer can participate in this upside.

4. What are the advantages (or disadvantages) of buying pre-IPO stock on something like EquityZen vs. waiting for the company to go public?

Advantages of investing on EquityZen: access to great pre-IPO investments so you can invest alongside leading institutions and VCs, and hopefully “get in early”. Also, it gives you a chance to “invest in what you know.” A lot of products we use in our daily lives (particularly on our computers or smartphones) are private tech companies. Lastly, you can invest in an asset class with low correlation to the broader public market. Disadvantages: well, the investments are still risky. A lot of readers lived (and invested) through the Dot-com bubble, and I’m sure you could make some analogies. Some of these Unicorns will still go to zero.

5. To gauge the demand or popularity of IPOs at any given moment, what stats do you use?

That’s a tough one. When the final price comes out (for an IPO), I look at the implied valuation. And then I look at a few metrics that, in the tech sector, are typically used to compare companies vs each other. Some of those include: – Enterprise Value as a multiple of annual revenue – Revenue growth (annually) – Profit Margin – Enterprise Value as a multiple of EBITDA (if the company’s earnings are positive!)

 From there, I see if the pricing appears “conservative”, which may be deliberate, as companies (and bankers) enjoy seeing an IPO jump higher once it starts trading.
And, as mentioned before, I look for leading VC firms as backers. Bonus points if they are buying more shares of the IPO!
If you enjoyed this interview or want to learn more, let us know in the comments below! If you want to read about our past Q&As with experts in specific fields, go here.

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