No Mercy / No Malice: Private

IPO Shifts

The dynamics of Initial Public Offerings (IPOs) have shifted significantly, with strategies like reduced floats and dual class share structures becoming more prevalent. George Hahn explains that banks often reward institutional clients with access to IPO shares at the offering price, creating a first-day pop that benefits these clients but leaves companies feeling shortchanged 1. The reduction in floats, where companies offer a smaller percentage of shares to the public, has become a tactic to create artificial scarcity and drive up stock prices. For instance, Instacart and Airbnb offered only 8% and 7.5% of their shares, respectively, leading to significant first-day gains 1.

In 2021, 25% of IPOs featured shorter lockup agreements that allowed insiders to sell before the 180 days were up.

--- George Hahn

Direct listings are gaining popularity as a more democratic alternative, bypassing traditional banking pipelines and allowing insiders to retain more control through dual class share structures 1.

   

Profitability Issues

The rise of unprofitable IPOs has raised concerns about market trust and investment value. George Hahn highlights that many companies going public today offer little upside to new investors, with a significant drop in the number of profitable IPOs over the years 2. In 1980, 78% of venture-backed companies were profitable at IPO, compared to just 10% in 2021. The shift towards private capital has concentrated wealth and power, reducing the need for public markets to fuel growth 3.

Among the 13 VC-backed companies that went public in 2022, not one was profitable.

--- George Hahn

This trend has led to a scenario where private investors extract maximum value before companies go public, leaving little for public market investors 3.