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Airbnb’s ‘hybrid auction’ was supposed to reduce the pop. Did it work?

Airbnb IPO

Hello! Today: why the hybrid auction didn't stop Airbnb and DoorDash from popping, the banker you might want leading your IPO, and Uber gets rid of its moonshots.

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Overheard

  • "Up until now, profitability didn't matter. It was all about growth … Over the past year, both regulators and shareholders have demanded that there's a path to profits." —Revolut chairman Martin Gilbert said the fintech was on track to make its first monthly profit.
  • "We are more Indian than anyone else." —Xiaomi's head of India, Manu Kumar Jain, is attempting to position Xiaomi as an Indian company in an effort to combat anti-China sentiment.
  • "Are we supposed to believe that [Masa Son] will now spend years and all of SoftBank's cash on this scheme, instead of doing what he really loves – making big bets in the tech space?" —Jefferies' Atul Goyal was skeptical about news that SoftBank's considering a "slow burn" buyout.
  • "We believe that cryptocurrency will eventually be powered completely by clean power, eliminating its carbon footprint and driving adoption of renewables globally." —Jack Dorsey explained why Square is investing $10 million in a "Bitcoin Clean Energy" initiative.

The Big Story

Pop it like it's hot

When Airbnb and DoorDash went public this week, they did so using a relatively new approach: a hybrid auction. An idea recently revived by Unity, the method is supposed to help companies price their IPOs more accurately, reducing the pop upon listing. Yet both DoorDash and Airbnb soared on listing. Actually, Airbnb recorded the biggest pop of any major U.S. IPO ... ever.

So the hybrid auction doesn't work, right? Not so fast.

  • "It's just naive and foolish to say 'the stock jumped, it was priced wrong,'" Lise Buyer, founder of IPO consultancy Class V Group, told me yesterday. Buyer worked on Unity's IPO, and had ... thoughts on what happened this week.
  • A reminder on how the hybrid auction process works: Institutional investors submit bids for how many shares they'll take at different price points; unlike in a normal IPO, where they submit a more general request for shares (that tends to be higher than the number of shares they actually want).

There are plenty of reasons for a disparity between the chosen price and the price upon listing. Most notably, retail investors. "Much of the day one jump for both of these companies is likely driven by retail investors," Buyer explained.

  • Pricing based on retail demand is risky, and often impossible: DoorDash sold 33 million shares in its IPO, while just 25 million shares traded hands on Wednesday. (That's less true for Airbnb though, which sold 52 million shares and saw 70 million traded yesterday.)
  • "The trading price sometimes reflects consumer demand that is perhaps for a smaller number of shares than what the company has decided to sell in its IPO," DoorDash CFO Prabir Adarkar told Protocol. "You or I could go into Robinhood and buy one share for whatever price it's at now, but it's a very different proposition than selling 33 million shares."
  • In fact, you could buy less than one share, thanks to the proliferation of fractional share trading. Pacific Life Fund Advisors' Max Gokhman told Bloomberg that he thinks that by making shares more affordable, fractional trading might have contributed to this year's spate of IPO pops.

Brian Chesky's reaction to the pop demonstrates another reason for pricing low: "The higher the stock price, the higher the expectations," he said.

  • "When a company chooses its IPO price, it is sending an implicit message to investors that it believes its future will justify the price to some degree," Buyer said. "If perhaps less disciplined investors want to pay [more than that] ... that is certainly their right to do, and great. But we're not the ones making that promise."
  • As Chesky insinuated, Airbnb's retail-fueled valuation might now be above what the company's comfortable with — something we've recently seen with Tesla, too. This all has echoes of 2000, Buyer pointed out.

Then there are employees and investors to think about. Companies might want to underprice and allow for some price appreciation so that employees can benefit when the lockup expires, Buyer said, rather than pricing too high and risking an Uber-style crash where staff lose out. They might also deliberately give IPO investors a first day boost in order to win their trust — which can prove handy when they come back to raise more money later down the line.

And there can be factors out of the companies' control, Buyer said.

  • If information about what people were bidding leaked before all bids were in, the auction wouldn't work properly. All bids need to be absolutely confidential to ensure everyone's bidding what they're actually willing to pay, rather than what they think everyone else is bidding.

Buyer doesn't think the hybrid auction process is dead. She expects "continued refinements" that might "alleviate some of the day-one pop," but said she's seen increased interest in the process from companies post-Unity.

  • She wouldn't share what those refinements might be, though, out of fears that someone might try to take credit. With the Unity IPO, "one of the banks was very enthusiastic, and one of the banks was not so enthusiastic [about the hybrid auction]," Buyer said. "And now that it's been a success, the bank that was less enthusiastic is claiming full credit."

And while we're talking banks, Buyer also said Credit Suisse had been great to work with on Unity's IPO. And when I spoke to Unity CFO Kim Jabal after its listing, she said "Credit Suisse embraced this from the beginning, and they have been amazing partners to us. Goldman Sachs built out the software platform, and so they have been great partners as well."

  • Goldman co-led both DoorDash and Airbnb's IPOs, while Credit Suisse wasn't involved with either. Make of that what you will.

A MESSAGE FROM MICRON

Micron

At Micron, we see an opportunity to establish memory and storage platform capabilities that will unleash software developers to deliver solutions that speed insight and ultimately support emerging customer requirements. The data-centric era has ushered in a new opportunity to tap data for business growth, but many companies continue to struggle to transform mounting data stores into competitive advantage.

Learn how here.

Up to Speed

  • Monday: Uber sold ATG, its self-driving unit, for $4 billion. It invested $400 million in the buyer, Aurora. Also Monday: Cisco bought IMImobile for $721 million; Paysafe said it would go public via a SPAC at a $9 billion valuation; and Investcorp flipped Avira after just eight months, doubling its money.
  • Tuesday: Uber sold Elevate. It invested $75 million in the buyer, Joby Aviation. Also Tuesday: Tesla announced a $5 billion share sale; Calm raised $75 million at a $2 billion valuation; and JD Health shares soared after raising $3.4 billion in its IPO.
  • Wednesday: C3.ai shares more than doubled on listing, with the company raising $651 million in its IPO. Also Wednesday: GlobalWafers bought Siltronic for $4.5 billion; Sony bought Crunchyroll for $1.2 billion; almost everyone sued Facebook; and Altimeter Capital reportedly invested up to $150 million in both Cockroach Labs and Workato, at valuations around $2 billion.
  • Thursday: Tsinghua Unigroup looked set to default on $2.5 billion worth of bonds, a big blow for China's chip self-sufficiency aims. Also Thursday: Adobe earnings beat expectations; Oracle earnings beat expectations; Broadcom said enterprise demand was "soft"; and EVBox said it would go public via a SPAC.
  • Today: Sea increased the number of its shares on offer in a secondary sale, raising around $2.6 billion. It recently got a digital bank license in Singapore. Also today, Hyundai bought Boston Dynamics for $1.1 billion.

Coming Up

  • The EU is set to publish its Digital Markets Act on Tuesday. Expect all the Big Tech companies to be targeted: Crowell & Moring have a good preview.
  • Wish should start trading on Wednesday, and Affirm might list too.
  • BlackBerry reports earnings on Thursday.

A MESSAGE FROM MICRON

Micron

At Micron, we see an opportunity to establish memory and storage platform capabilities that will unleash software developers to deliver solutions that speed insight and ultimately support emerging customer requirements. The data-centric era has ushered in a new opportunity to tap data for business growth, but many companies continue to struggle to transform mounting data stores into competitive advantage.

Learn how here.

Thoughts/feedback/tips? Email me — shakeel@protocol.com — or tips@protocol.com. And subscribe to get Index in your inbox every week. Thanks for reading — have a great weekend, and see you next week.