The challenge is that in moving from theory to reality, the foundational purposes of an IPO begin to get in the way, writes investor Greg Martin.
In the life of a company, public listing remains seminal, writes Greg Martin.
Greg Martin has been a leading venture capital investor for over two decades. He is not an investor in Robinhood.
It's been quite a year for Robinhood. Its users skyrocketed during the early months of the COVID-19 pandemic before becoming the face of the r/WallStreetBets frenzy earlier this year. In such a short period of time, Robinhood's app has actualized and consolidated day traders' influence in a way that could not have been fully imagined when it launched just a couple years ago — both by democratizing access and by becoming a lightning rod for debate along the way.
Robinhood has done all of this while also rapidly raising impressive capital, navigating its way toward an IPO. And here, a fascinating question presents itself. The app has proven a vehicle for reviving even the most moribund stocks like GameStop and AMC. Now, at the other end of the company life cycle, can Robinhood cause the same disruption in funding companies' birth on public markets? And in its biggest gambit yet, might Robinhood be willing to test that assertion with its own highly anticipated listing?
2020's IPO boom saw demand for shares in new companies continue to outstrip supply, and valuations now "pop" at various stages — from initial announcement of intentions to S-1 filing and the first week of public trading — far more strongly than they have in the past. On the company side, surging interest has propped up previously under-utilized routes to the market, including direct listings and special purpose acquisition companies, or SPACs. So, we've already seen evolution afoot.
Traditional IPOs have seen exploding share values, too, and when companies are worth tens of billions more than what they were believed to be only six months earlier — a trend that began with Snowflake last year — few will complain. Yet that doesn't tell the whole story. Because valuations are tracking higher within the listing period, the participants traditionally included in IPO syndicates — banks, brokers and their institutional clients — are most likely to benefit.
Individual investors, meanwhile, must look at other alternatives: get in early on the private secondaries market before the IPO, but live with a lockup period, or wait on the public listing. Waiting provides flexibility and liquidity but may also mean the shares are already trading an order of magnitude (or more) higher.
All of this amounts to hundreds of millions (or more) in value left on the table with each listing, for investors and companies alike. And in the current environment, that has led some to wonder whether a modernized, more inclusive approach to IPO underwriting is possible.
The idea isn't new. For startups with millions of highly dedicated users, a collectivized IPO has been contemplated in the past; Facebook, perhaps most famously, gave it some thought. The challenge is that in moving from theory to reality, the foundational purposes of an IPO begin to get in the way.
In the life of a company, public listing remains seminal. It is resource-intensive and high-stakes, and at times, even existential. Among other things, companies expect a stable book, upward trajectory in share price after the IPO and significant marketing and reputational value on the back of the event. Each of these grows still more important as companies increasingly stay private for longer and their capital table becomes more complex. So even while the listing market is booming, significant risks remain for underwriters and share issuers alike.
Pulling in an entire new block of subscribers has historically (and rightly) been seen as making the process far more unwieldy and potentially more expensive to manage, as well as inviting inevitably greater regulatory scrutiny. For many tech startups this becomes a battle of philosophy: Use democratizing platforms to search out value among the masses and their data, versus returning shareholder value. The latter typically wins out.
But what if the company's value proposition, as in Robinhood's case, lies in financial technology and infrastructure that is purpose-built to handle each of those issues effectively? Not only that, but it has already demonstrated its maturity and operational robustness — and continuing external investor confidence in its model — through the tumultuous days of the meme stock run. Most companies would welcome the opportunity to grow the syndicate and access that same aggregated pool of day-trader interest, especially when it may be inclined to oversubscribe at $20 a share instead of $16.
All of this is highly ambitious and easier said than done. On the platform (demand) side, Robinhood would have to determine some parameterization for user participants, defining profiles that are suitable to the risks involved in ownership of a private company turning public, particularly when that company's business is subject to regulatory and increasing political oversight. The same right-sizing will be required for the underwriters, who will need to be incentivized to accept and handle the "Robinhood Syndicate" just as they have the app's broader order flow.
Lastly, of course, would be Robinhood's own willingness to take the risk on such a grand experiment. For a company that has already had success remaking the markets in its image, this would be a new triumph — not only over one of the oldest vestiges of investment banking but also over the other Big Tech giants who have come before, thought about it, but were proven too cautious to take the leap with their own users at their side. It could be the ultimate "putting your money where your mouth is" moment. Or, in a time when startups are netting IPO valuations in the tens of billions the old-fashioned way, it could prove too clever by half and sputter out.
Either way, we know this much: Robinhood does not lack for creativity and an ambitious leadership team and clientele, and these record-breaking days for IPOs could be a perfect moment to revolutionize the way syndicates are built, with both fairness and value delivery to all sides of the IPO.
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