It's useful in comparison to the IPO price, which was $15. This means they left a lot of money on the table.

That's not necessarily true. They were selling 10 million shares all at once in the IPO. Just because a smaller number of shares are trading higher now doesn't necessarily mean that they would have been able to sell that whole slug of 10 million at 23.99.

There may be an effect there, but IMHO it would be a lot smaller than what we're seeing. As of 1:49, about 14.5 million shares have traded on the open market with an average price of about 25. Seems like there's healthy appetite for the shares far above the IPO price.

It's troubling to think of the conflicts of interest that go into the pricing of an IPO. The company would like it to be as high as possble, holding the number of shares sold constant. Investment bankers would like to preserve their good relationship with the hoardes of potential IPO investors, and therefore would like the IPO price to be below the "true value" of the stock, to provide their clients with a nice short term return. Another interesting bit, is that most of the employees of the company going public actually care about the price of the stock six months from now when their lockup ends, so their incentives are not exactly aligned either.

In short, the whole "big price pop on day 1 == good" idea needs to go away.

> Investment bankers would like to preserve their good relationship with the hoardes of potential IPO investors, and therefore would like the IPO price to be below the "true value" of the stock, to provide their clients with a nice short term return.

Do you have a source for this? It was my understanding that the investment bankers want the IPO to be priced as high as possible because that's how they make their commission. See the potential windfall for JP Morgan on the Saudi Aramco IPO

Commissions don't align interests very well (real estate, cars, etc.) because you have a much greater incentive to increase your turnover and number of clients than to get a slightly higher price for one sale.

Investment banks often have to make guarantees about selling all of the shares, and the worst thing that can happen for them is to have a broken IPO (shares close below the open price). The investment bank that led Facebook's IPO had to buy back shares immediately to prevent that from happening.

Also, many of the initial shares are bought from the investment bank's book of contacts that they reached out to on their roadshow. If you lose money for your fund manager buddies, they won't invest in your next IPO.

Both are true. The bankers make more money on this deal the higher it prices, but they can't get the next deal done unless they're on good terms with investors.

This is correct. It is a balancing act between two conflicting parties.

Yeah, I think this is classic econ 101.

Share price is a function of quantity supplied. You reduce quantity supplied, and for any market with a downward-sloping demand curve, the price will go up.

Perhaps a better way to look at this is that (1) market participants have differing views of the fair value of the securities, and (2) given the current market price, only market participants who think the shares are worth >= $24 (last trade) will buy. There is no "true price", just a lot of opinions resulting in individual buy/sell decisions.

But classic econ 101 would also say that if the above was true, then everybody who thought the shares were worth only $15 (plus spread) would sell, resulting in share price dropping back to around $15.

I think you're wrong. My reasoning is simple. If the IPO investors thought that the company was worth less than $24 (e.g. $16), they would have sold already, and the price would have dropped. If they thought the company is worth $24 (or more), they would have bought the IPO at any price between $16 and $24 (minus spread) as well.

Really, the only argument for under-pricing the IPO is as a favor to the banks/hedge funds. But the question is, did the banks ever return the favor?

Isn't there some law that all investors buying stock at around the same time have to be offered the same terms?

I'm not a lawyer but I think this is part of what's behind the trend toward convertible notes in company financing in SV, compared to the traditional priced equity round -- too hard to give a different deal to different investors, for what amounts to the same shares?

Would love to hear more from someone who knows more about this.

I think it's very hard to argue that day 1 or near-term price action on any IPO is solely based on value instead of sentiment.

And yet finance 101 disagrees.

Yes, market cap should be independent of number of shares, and the market cap = # of shares * $ per share formula still holds, which is why many prefer to think about market caps rather than accounting units.

But it's also the case that a firm issuing a share for the price of $15, increases book value of the firm by $15, and this directly offsets the resulting shareholder dilution. Arguing it was impossible to find buyers at 24 dollars a share is a bit silly, given that the market immediately did just that.

Let's say that HarryCo, my own personal widget company, was IPOing. I'm selling 100 shares in the IPO.

Goldman Sachs would like to buy 50 shares for $14 each. Morgan Stanley would like to buy 50 shares for $15 each. Barclays would like to buy 50 shares for $16 each.

Citizen Bob would like to buy 5 shares for $24 each.

So what happens? HarryCo IPOs at $15 (the maximum I can get to cover all 100 shares) and then immediately pops to $24 when Bob buys 5 shares from Morgan Stanley.

I did not leave $900 "on the table" in my IPO because there wasn't enough demand to sell 100 shares at $24.

A lot of your hypothetical hinges on GS / MS buying at 15 and holding at prices below 24. Which is a lot like saying they actually value it at 24, but were somehow allocated shares at a bid lower than that. IMO, Google did it right with the Vickrey / second price auction, and apparently this has been formalized OpenIPO: into https://en.wikipedia.org/wiki/OpenIPO

If we assume that GS and MS have a reserve price of 24, as evidenced by the market open, then their strategic 15 and 16 bids do represent money left on the table.

Fact is Goldman Sachs - and maybe other banks - were allocated shares with a priviledged price during the FB's IPO as they were working on the IPO while buying stocks for their own clients. I know this was a special IPO, but my guess is that it is likely to happen for others

The special IPO is the one where that _doesn't_ happen.

You missed the last part:

> And then immediately crashes back to $16 because there are no other buyers willing to buy at $24.

Which obviously didn't happen.

I'll grant that that's the commonly-accepted way to look at market cap, but I think it leaves out a crucial assumption: "Given the current supply and demand for/of the firm's equity".

But I think that's not always a great assumption, because sometimes things happen that don't affect firm fundamentals (profit, revenues, margins) but do affect valuation, like changes in interest rates, shifting investor sentiment on the sector, a lighthouse investor publicly stating their intention to buy/sell, etc -- all of these things change market cap without altering the business per se.

All this to say, I think the simple CAP=SHARES*PRICE formula is too simplistic. I think it's more accurate to think in terms of ranges of what the firm's equity might be worth, and realize that it's a highly subjective assessment based more on aggregate opinion, than some hard objective law of physics.

Indeed! This is the same reason that when companies get bought (like LinkedIn) the price is generally a decent premium over the last traded share price.

The volume is 12 million and it hasn't traded under 23. So, yes, in theory they could have sold the block for more than $15, possibly as high as 23 and change.

Ya, I agree that it's likely that some money was left on the table though I'm skeptical that they could have gotten as high as 23. Comparing volume to the size of the IPO block is a bit of an Apples to Oranges comparison.

Oh, for sure. And it's better to "leave money on the table" than come out with a whimper. The pop will almost certainly help them do a secondary in the next 4-18 months.

"Leaving" sounds like a choice, there are lots of considerations. We don't know how the roadshow went, so we don't know what people were saying about participating at different prices. We also don't know what constraints they had on dilution from previous term sheets.

Personally I'm glad to see a "Unicorn" step out of the corral and survive in the wild. If it is still above a $B valuation after the employee lockup period ends that will definitely classified as a success.

This comment is confusing... I don't know if is me not knowing how an IPO works or parent.

For what I know during the normal stock exchange you sell to the highest price and buy to the lowest.

Suppose there a stock EXMPL, and some people want to buy and other want to sell.

Now put all those people in a line with the seller facing the buyer sorted by price.

So in front of seller line there is the one that want to sell at 100, followed by the one who want to sell at 101, then 103 and so on.

In front of the buyer line there is the one who want to buy for 99, followed by 98, and then 97 and so on.

In this situation no exchange is been made because they cannot agree on the price.

Now suppose that someone is betting heavily on EXMPL and decide to buy 100 shares at 102$. It goes in the first position of the line and ask to the one who is selling at 100: 1> "how many share can you sell me at 100?"

2> "75 share for a total of 7500$"

1> "Deal, here the money!"

Now our buyer goes talking with the second of the line...

1> "how many share can you sell me at 101?"

3> "100 share for a total of 10100$"

1> "I only need 25 for a total of 2525$, here are the money"

2> "Deal, here are the share!"

And the 102$/share guy left.

At this point the last tick sign 101$ which is the "price" of the stock, note that nobody is buying anymore at more than 99$.

During an IPO I wouldn't expect much difference...

In my understanding the money "left on the table" are just the one needed to rise the price...

Am I missing something?

IPOs are sold by salespeople with pitch decks to brokerage firms, who then sell to their clients. It's not done through an exchange; it's done on handshakes and phone calls, on human time scales, in the weeks/months leading up to the first day of trading.

People sometimes refer to the first day of trading as an "IPO", but that's not quite right.

Thank you :)

You're overanalyzing it. The company priced 10mm shares at $15 with the banks running the IPO so:

company -> banks

The first actual public trade was $23.99 so

banks/clients of banks -> public markets.

Aaah it makes more sense now :) thanks

Or they had to price at a larger discount to encourage a full book and enough of a pop to support the stock.

That's a bit of a mis-nomer because a pop sets them up much better for a secondary. Among other benefits of a pop. Absence of a pop gives the impression of "failure" which takes awhile to overcome.

"Failure" like Facebook?

A more serious question: how many secondary offerings are there?

It depends, especially on the sector. Experimental Biotech companies will do many secondary offerings throughout their existence.

In this case the underwriter who controlled this IPO likely has what is known as a "green shoe". The green shoe is an agreement to sell more shares (up to 15%) after the IPO and they acquire them from the company at the IPO price. This means the bank could sell 15% more stock that wasn't part of the original IPO at current market prices and only have to pay the company the original IPO price. The company raises more money and the underwriter makes more profit. This happens when there is a successful IPO where the market prices the stock higher than the IPO price.

Give things a few months to settle. Right now there are lock-ins that keep prices higher than they might eventually be. One the lock-ins are over, the price will be more realistic.

I'm with you that huge first day bumps don't help the company much. A little PR is nice, but if the price stays that high, they underpriced.

The investment banks have huge incentives to have these first day pops, as it's free cash for some of their high-volume customers.

So if they sold at their true price via the Google-style reverse auction, they would have $9 * 10 million more to use for business growth. Instead lots of hedge funds and high net-worth individuals that are big clients of GS and JPM made an easy $100k this morning.

> true price via the Google-style reverse auction

Even with the auction, Google IPO'd at $85, and the stock opened at $100. If you think that the investment banks gave away $90M of Twilio's money to their friends, do you believe that Google did the same thing with $300M of their own money?

Or they would have pissed everyone off by having an auction instead of a regular IPO and they wouldn't have had nearly as much interest in their shares. Google was a very special company and even then nearly managed to screw up their IPO.

No need for an auction. I don't know about this specific IPO, but often there are predictions of what the true stock price is (i.e. the "first trading day" stock price) floating around before the stock starts trading. E.g. for Facebook, the expected share price was about 37, the IPO was at 37, and the trading opened at 37. Facebook got the "premium", instead of the hedge funds and banks.

Facebook may be the worst example of an IPO done right you could have picked. NASDAQ bungled it so badly they got sued:

http://www.reuters.com/article/us-nasdaq-omx-facebook-litiga...

The article says it was technical issues. That has nothing to do with the discussion.

It absolutely has to do with the discussion. The reason for the tightness of the IPO and first day closing price of Facebook was because of those technical issues. Trading was disastrous and had Facebook not been a household name, it's easily believable that it would have traded even lower.

Actually, the news prior to the IPO about FB's advertising not being quite as effective made people lose a lot of confidence in FB and want to pull out.

This exposed a race condition within the IPO process that bungled it up. The post mortem talks about "order modifications" which are actually order cancels right up to the point of the cross was supposed to take place.

http://www.nasdaqtrader.com/TraderNews.aspx?id=ETA2012-20

Pricing the IPO lower would have had people not feeling that the IPO was overpriced. The overpriced feeling people got caused them to want to tap out and brought out the particular race condition that Nasdaq hit. Normally, IPOs get lots of buying interest. The all-in, then folding behavior was unprecedented as people who didn't believe in the company IPO would never have put in bids in the first place.

How are you tying efficacy of advertising with busted exchange? I don't see it.

This deal was upsized very close to the IPO date and completely oversubscribed with huge retail interest. Everyone wanted this deal to succeed and news behind it was extremely positive. Don't see how random chatter about advertising causes a stock exchange to blow up.

To piggyback on the weird comparisons, why didn't Square encounter any issues on their IPO? News was extremely negative and it was said that they were forced to IPO to cash out investors.

But that's good for the GGP's argument. Going down means they extracted maximum value from the market. It's a very successful public offering by GGP's metric.

What do you mean by "going down"? The IPO price was the IPO price. If people are unable to trade during the day and the price is unchanged, it just means that the stock didn't have an opportunity to trade up.

But Facebook didn't trade at a higher price when there was no longer any trouble. Nothing material changed about Facebook in those few days. So either the price would have gone down (meaning Facebook did the right thing), it would have stayed flat (same here), or if it would go up, it would go up when the exchange fixed their trouble (it didn't).

Nothing indicates that this went poorly for Facebook. It seems to indicate the opposite.

Think about it this way: 9 * 10m = $90 million. But probably they couldn't have sold the whole 10M slug at 24. Let's guess and say they left more like $45M on the table.

They are currently at a ~2B valuation.

45M / 2B = 2.25%

Twilio is (in theory) a high growth tech company. Say they want to grow at 15% a year. 2.25% / 15% = .15 or about 2 months worth of growth.

2 months is certainly something, but in the grand scheme of things isn't the hugest deal in the world.

Sentiment behind tech IPOs is already negative and complicating the IPO process would only further that sentiment. Hard to imagine the bookrunners would ever agree to that.

Actually, for an IPO the stock price is very useful. It opened at $15 which was higher than the previously announced range of $12-14 and have shot up 70% in early trading. It's a great start for a tech IPO, hopefully this will encourage more companies to list.

> hopefully this will encourage more companies to list

hopefully this will encourage more VC's to fund.

Quick edit: not saying there isn't a lot of funding already happening but there's fear that VC might dry up. Hope it doesn't happen.

Doesn't that mean the company missed out on about half its value?

Eh thats kinda hard to say. Looking at the quoted price of a stock is a little bit misleading without looking at the Bid and Ask volumes.

Currently the bid of ~1000 shares are available at 24.97 (these number will vary second to second)

That doesn't mean that all of the shares IPOed could have been sold for that price.

Was there likely money left on the table? Yes. But its pretty difficult to put a dollar amount to it.

Yep that's called money on the table.

Not really, they only sold a small percentage of the company in the initial offering.

Still looks like ~$100,000,000 was missed.

The conventional logic is that you don't want to try picking up nickels in front of a steamroller by pricing your IPO too high and having it sag out of the gate. You want demand for the shares and then let the market price them. If Twilio had priced their shares at $24 they almost certainly wouldn't have sold them all and it would have been a really ugly IPO that resulted in a lower total market cap.

tl;dr sentiment is very important for IPOs

> sentiment is very important for IPOs

Who cares. Compare Twitter ("popping" IPO) vs. Facebook ("sagging" IPO).

I don't see the point in comparing the two but if you want to, Twitter had much better near-term post-IPO performance than Facebook did. We all know what happened after that. It's almost as if during a period where little fundamental information is available (post-IPO), something else must be driving trading (sentiment), while when more fundamental information is available (first earnings report), fundamental information plays more of a role.

Why would then companies want to cater to sentiment-driven investors?

How are investors supposed to value the company right now at this moment?

By selling at $20, they would have picked up another $50 million.

Probably, GS and JPM got a lot it instead.

Define missed in this context. Missed to means they had an opportunity to sell those 10mm shares @ $23.99 elsewhere. I don't think that would have been remotely possible.

Google finance is showing price $28, cap $4.6bn at the mo.

Literally no one in the industry looks at IPOs that way.

There exists at least one in the industry who looks at IPOs this way (as manifested by the parent comment).

The OP's profile leads me to believe they're not in finance although I could be wrong.

Change in market cap is a very awkward way to look at a recent public company because it's a very volatile measure and also is harder to mentally extrapolate other metrics from.