What Professional and Retail Investors Look For In An IPO

Published on March 1, 2021

The IPO market has been buzzing for a couple of years now after several disruptive companies managed to make waves in the public market instantly after going public. Companies like Beyond Meat (NASDAQ: BYND) was just one of many that skyrocketed in value after going public in 2019. But what makes a good IPO, and how can retail investors sniff out the more promising ones as we navigate new technology territory in the 2020’s? We talked to several retail and professional investors to get an idea of what it is they want to see before they invest in an IPO.

Know what the company has to offer within its sector, and whether you believe in what it’s doing.

First thing’s first, you should ask yourself if you like or believe in the company that you’re looking to invest in. Investing in a company can be a sort of ethical statement because it directly supports the company to purchase its stock. If you’re passionate about supporting sustainable businesses or only want to support businesses that you believe are making the world a better place, do your research and ask yourself if the company is doing those things before you invest.

Aside from whether or not the company is turning a profit as a private company, retail investors say that whether they’re familiar with the company and its sector are a major influence in whether they’ll invest in its IPO. “If I’m familiar with the industry, I can usually make a confident assessment where the company’s products stand among its competitors’ products,” says longtime retail investor Velin Dragoev. “Once I’ve made that assessment, I look into the company’s publicly traded competitors. Do I think they’re overvalued? If so, then this could be a good short-term investment. Otherwise, I pass,” Dragoev says.

It’s not going to always be the case that a company you’ve been following for years is going public, and investing in IPOs requires a bit more due diligence than Vanguard favorites. “Basically I try to understand the business and it’s prospects, financials, valuations, and the competitive landscape,” says Brian Stewart, a 20-year retail investor. “In order to gain a clarity on the positioning of the company, I compare with industry standards related to product portfolio relevance and pricing capability. I primarily focus on the purpose of the IPO and the quality of their management. And finally, I do check the subscription status that reflects the interests of investors,” Stewart says.

With so many IPOs to choose from, retail investors really have to pay attention to which companies they’re interested in and which they should pass on. Weeding out the ones that pique interest takes some time to figure out. “Primarily, an innovative product or service really stands out for me. So, I look for tech companies that aim to provide solutions in a novel and unique way,” says Stewart.

Be aware of the specific risks that come with investing in an IPO, and learn about the other ways that companies can enter the stock market.

For IPO’s that have been newly introduced to the market, investors say that it can be hit or miss. Some companies have explosive entries onto the stock market while others don’t live up to the hype—and some defy all expectations and do much better than expected, but are more consistent with growth than the disruptive entries. “When looking at an IPO there’s two ways it can go, it can be hyped up so much that it’s price skyrockets before it is even released to the public such as was the case with the recently released Bumble IPO,” says Ethan Taub, CEO of the financial service Goalry. “I tend to wait a day or two to see the market movements. You will always notice a dip after an hour or two of trading as day traders buy these stocks during the first 30 minutes and sell for a profit (hopefully) later on in the day. As the craze dies down after a while, that’s when I tend to get in on the action. Before I even look to invest my money I do plenty of research on the company’s books, ensuring that I can expect a great return on my investment either short or long term,” Taub says.

“I have QuantumScape (NYSE: QS) on the radar,” says retail investor Daniel Penzing of a solid-state battery company that went public not via IPO, but by merging with an SPAC—similar to how the medtech company HIMS went public in early 2021. “Their technology has breakthrough potential and could pretty quickly justify growth of 10x or more. However, this is a riskier moonshot investment, because if the technology doesn’t work out as planned it could go to pretty much zero as well. I’m very curious for the news coming out of their HQ in the next couple of weeks,” Penzing says.

Know the advantages that professional investment firms have over retail traders.

“Retail and professional investors have different approaches when it comes to IPO,” says Inna Rosputnia, a professional investor and finance expert. “First of all, the investor has to make deep research and learn all details about the company. IT can be tough sometimes as we usually have limited information about private companies. But we are lucky to have Google. So, every investor can search for the company’s competitors, industry perspectives, etc. This way, you can build your own unbiased view before making an investment decision,” she says.

Rosputnia also warns that retail investors often miss some key research opportunities when looking for new IPO investments. “In most cases, retail investors don’t pay attention to the company’s underwriters. But it is very wrong. I would say, knowing underwriters’ profiles is one of the keys to successful IPO investing. Companies with strong underwrites (investment banks, etc) are likely to perform better,” she says.

But with so many variables, investing in IPOs remains a volatile investment strategy that both retail and professional investors warn not to get too involved in. “Always stay a bit skeptical. There is a lot of uncertainty around IPOs. So, the most cautious investors usually do better. If you have some doubts or skepticism, you are likely to get out fast if something goes wrong,” says Rosputnia.

Other investors point out that retail investors should be skeptical of companies that are valued too high in the first place. “Bankers involved in the road show and other aspects of the IPO necessarily try to ensure that a company is priced reasonably so that the company [can raise] the money they need without leaving too much on the table,” says Thomas Jepsen, CEO of the Atlantic Aspiration. “The anticipated WeWork IPO is probably the best recent example of a company that simply tried getting too high of a valuation, why the IPO ultimately failed,” Jepsen says.

Julia Sachs is a former Managing Editor at Grit Daily. She covers technology, social media and disinformation. She is based in Utah and before the pandemic she liked to travel.

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