Should IPOs be priced to perfection or with room for aftermarket appreciation?

Jason Lemkin · Oct 11, 2023

Klaviyo is about as good a business as you can find — ~$600M revenue, 60% growth, profitable, ~120% NRR from SMBs — but it was priced to perfection at IPO

The only real knock on it is the Shopify dependency, so the weak aftermarket is a pricing problem, not a company problem

Scope: Shopify dependency as a caveat

39:18 20VC Roundtable: Are IPOs Back? Is Growth Dead? What Does it Take to Raise a Growth Round Today? How Do VCs Solve The Liquidity Challenge? Will We See a Massive Resetting of Valuations? AI Hype Growth Rounds?

Imran Khan · Aug 26, 2024

Pricing an IPO to perfection backfires: large funds cannot get full allocations, and without a discount that lets them dollar-cost average up in the aftermarket they will sell instead, causing the stock to trade down

A Fidelity-sized PM getting only $30M of a $200M IPO must build the position in the aftermarket; if the stock only rises 10% they cannot average up, so they sell and create a supply/demand imbalance

26:06 20VC: Why the IPO Market is not Closed | Why Revenue Multiples are BS and Founders Need to Change | Advice From Jack Ma, Jamie Dimon and Evan Spiegel | Lessons from Taking Snap & Alibaba Public with Imran Khan

Deven Parekh · Oct 11, 2023

Deliberately underpricing an IPO to make the aftermarket pop carries its own reputational cost — the press would run stories about billions left on the table and call the IPO market a scam

The media narrative flips either way, so there is no pricing choice that escapes criticism

40:07 Underpricing for an aftermarket pop invites its own media backlash about money left on the table

Deven Parekh · Oct 11, 2023

When other companies leave money on the table and trade up after IPO, it benefits growth investors — it creates sizzle and puts institutional buyers on gains, giving them confidence to buy the next issue

Mutual funds and other buyers sitting on an up portfolio have more confidence to participate in subsequent offerings

40:27 Leaving money on the table elsewhere builds market confidence benefiting subsequent issuers

Imran Khan · Aug 26, 2024

Concentration in the IPO buy book is a characteristic of a quality, in-demand IPO; broadly distributed small allocations lead investors to dump the stock

A PM running 30-60 names with large AUM gets no needle-moving benefit from a tiny allocation, so they must either buy more or sell out; active managers need meaningful position size to care

32:31 Concentrated allocation in quality ipos prevents dumping broad distribution does not