It is well known that Wall Street really serves the people in the know. What it should be is a free market where all of the information about a stock is released publicly and everyone has the same data to make investment decisions. Yeah right! Wall Street has created a nice uneven playing field and good luck to the ordinary “dumb” investor.One area where Wall Street feeds good opportunities to the general public is through Initial Public Offerings or what the industry calls IPOs.When a company needs to raise capital, instead of going to wealthy private investors, institutional investors or banks, for that matter, they go and list their company on one of the public exchanges: NASDAQ, NYSE, etc.This is a great way for a company to access capital and a great way for investors to come in early on the action and invest their money.
The investment banks take a nice chunk of money for the service of taking a company public and the general public finally has an opportunity to invest with a reasonably level playing field. Think about some of the greatest returns from IPOs of the past: Microsoft, Apple, Amazon, etc.Investors who are patient can be heavily rewarded with returns hundreds of times their initial investment. Nice! However, something different has happened with IPOs in the last few years. Companies are going public much later and thus asking for much larger valuations. The ordinary investor can now only expect a 5 times return with the Facebook IPO when the original investors got a return of 500 times on their investment.
IPOs biggest hits
In 1986 Microsoft went public and raised $60M. Apple raised $100M in 1980. Amazon raised $54M in 1997. This is $1.7B less than Twitter raised 16 years later. The large investment banks decided to focus on very large offerings and locked out the smaller ones. Small companies can raise capital from private equity firms, venture capitalists and angels. Basically, the sharks, those who call themselves “smart money” and like to take “dumb money” and invest it.
Why is the IPO in the doldrums ?
PitchBook, which publishes technology research, has compiled a list of technology IPOs in the last six years. As you can see, the IPO is on a rapid negative trend.