To The Moon

An IPO used to be the start of a new era for companies.

$Apple(AAPL)$ IPO’d four years after it was founded in 1980 with a $1.8 billion valuation.

$Microsoft(MSFT)$ went public in 1986 as a relatively mature 11-year-old company with a $777 million valuation.

$Amazon.com(AMZN)$ went public three years after it was founded in 1997 with a $438 million valuation.

$Alphabet(GOOG)$ went public six years after its founding at a $23 billion valuation.

It used to be the case that companies would go public because they needed money on a scale that only public markets could offer. And in some cases it was a way to unlock value for early employees (ex. Microsoft and Google were profitable and didn’t really need the money).

But the last 20 years has brought liquidity to private companies that once seemed unfathomable. Venture capital funds have gotten bigger, corporations are writing huge checks, and sovereign wealth funds are pouring tens of billions of dollars into startups that are now as valuable as the biggest companies in the world.

As I write this, SpaceX is preparing to go public and is seeking a $2 trillion valuation.

OpenAI and Anthropic are reportedly looking to go public later this year.

Buyer beware.

The Evolution of Startup Funding

Startups today aren’t really startups the way we used to think of them.

Anthropic raised $124 million shortly after being founded, Thinking Machines Lab raised $2 billion on little more than an idea and good resumes, and Super Safe Intelligence raised $1 billion at launch.

These are insane when put into historical context.

Google famously got a $100,000 check from Andy Bechtolsheim, co-founder of Sun Microsystems, when it was little more than a demo in a dorm room. But that was considered a MASSIVE check in the 1990s.

$Uber(UBER)$ and $Meta Platforms, Inc.(META)$ were built with $10,000 checks from small investors to start.

$Amazon.com(AMZN)$ founder Jeff Bezos had to take 60 meetings to raise $1 million in seed money to start the company.

The modern startup is raising far more money and has many more options than these companies did. And that’s simply changed the game.

What hasn’t changed is that public markets are the biggest source of liquidity for investors, especially as funding rounds get bigger. OpenAI may be able to raise $110 billion from investors without being public, but they eventually need to go public!

For investors, even in these massive rounds, they need an exit.

They need to sell to someone.

That someone is you and me.

Beware of Hot IPOs

These exits (IPOs) are built to maximize the value for selling shareholders. They’re not inclined to leave upside for you and me and often they don’t.

In 2020, some of the hottest companies in the world went public, and investors were tripping over themselves to buy at the IPO.

$Snowflake(SNOW)$ was one of the most popular, and investors who bought the IPO would have lost half their money over the last 5+ years.

Remember when $Unity Software Inc.(U)$ was the gaming platform everyone loved and bought a big advertising business? It seems like forever ago.

Even an eventually great stock like $Palantir Technologies Inc.(PLTR)$ went through an 84% drawdown before skyrocketing.

2021 wasn’t much better.

$Coinbase Global, Inc.(COIN)$ max drawdown was 91% in 2023, less than two years after its IPO.

$Rivian Automotive, Inc.(RIVN)$ is still down 85%, and the $78 IPO price seems…crazy.

$Roblox Corporation(RBLX)$ , $Warby Parker Inc.(WRBY)$ , and so many more were money losers for investors.

Buying hyped IPOs doesn’t have a great track record in recent years. So, beware buying the hype of IPOs today.

More Questions Than Answers

I’m not saying that all of these companies will be bad stocks forever. But with ample capital in private markets, companies IPO at opportune times for insiders and early investors, not for the benefit of you and me.

That’s why VCs and founders call an IPO an “exit”.

VC firms can mark their gains to market when companies are private, but those are paper gains. An IPO allows firms to distribute shares to investors and lock in gains that determine their “carry” fee.

If someone else is selling, you should ask yourself why.

That’s why I’m already leery of upcoming IPOs from companies like SpaceX, Anthropic, and OpenAI. I’ll happily take my gains from Alphabet’s ~10% stake in SpaceX and ~14% stake in Anthropic, but I feel no need to rush into the IPO.

I’m not going to be exit liquidity for the richest investors and founders in the world.

But based on the hype, that may just be me.