We posed this question to our Zintro experts: What is behind the recent trend of tech IPOs performing badly? And here are their responses.
Fred Thiel, an expert in strategy and marketing, says that the recent trend is the result of companies performing below expectations set at the time of the IPO. “It’s not limited to tech IPOs. It would be the same for any category of company going public. If you beat expectations, the market rewards you. If you miss, then the market penalizes you. The difference between tech IPOs that perform well (i.e. trade above the listing price six months after their listing) versus those that perform badly is as simple as the old adage under promise, over deliver,” says Thiel.
Well performing tech IPOs like LinkedIn, Yelp, Jive Software have all met or exceeded the expectations set when they went public, and the market has rewarded them with a stock price that trades above the listing price, notes Thiel. “Poor performing tech IPOs (e.g. Facebook, Groupon, Angie’s List) have not met the expectations set when they went public, and the market has penalized them with a stock price that trades below the listing price. Groupon and Facebook were both victims of excessive hype and optimism driving demand for the stock and not enough in-depth analysis of the business model, performance metrics, and risks, so when performance did not meet the expectations, the stock got crushed,” he says
Rakesh Chopra, a commercial lending expert, thinks that tech IPOs are not as successful these days due to a number of factors.
- Eight out of ten companies are not able to gain critical mass due to contemporary technology, talent, orders, margins, and so on.
- Pricing of IPOs is too high and so opaquely arrived at that it has already factored into profits. This approach is not rewarding for the IPO subscriber, who is usually buying on the secondary market. The retail subscriber to an IPO is feeling cheated on all counts including insider trading.
- General retail investors are out of the equity market as they may feel it is too risky and the subscriber class has lost interest due to losses/no/low returns record.
- Due to foreign exchange adverse movements, emerging market tech companies have lost a lot of money and in many cases are going for IPOs to get money to repay their Forex bonds.
- Capitalist nations like the US and UK are now convergent in their views and are actively discouraging outsourcing, giving work visa to Indians, Asians & NON EU workers, creating opaque and inhuman rules and non tariff barriers to stop/ restrict imports from developing economies of Asia, particularly China & India. All such measures reduce the markets for tech companies and lower investor confidence in future of tech companies.
- The technologies are changing so fast that potential investors are not sure if a company has the capability to assimilate such changes competitively and investors are scared.
- The track record of promoters of tech companies is not impressive and perhaps looks like startups. Even if some are backed up by angel investors/PE funds, potential investors may see them as a ploy for skimming profits from retail investors through IPOs.
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