How To Grade This Week’s airbnb and DoorDash IPOs

[I originally published this on Medium pre-IPO, so the tense is outdated, but I think the framework holds]

Using a Weighted Scorecard Instead of Just “Did It Pop or Not?”

Every big tech IPO results in predictable Twitter chatter. If the stock price pops on its first day some folks believe the bankers took advantage of the company because it didn’t optimize the amount of money it raised in the offering. If the stock prices doesn’t pop (or even trades down a bit), they get the ‘damned if you do, damned if you don’t’ outcome of headlines that read “TechCompanyX IPO Meets Lackluster Demand.”

Since two of the largest consumer tech IPOs post-Uber are occurring this week (airbnb and DoorDash), maybe we can short-circuit the simple hot takes with a different approach? I’m going to suggest that any evaluation of an IPO should look more like a scorecard, where you evaluate the company based on the goals of an offering, weighted by their relative importance.

65% Did the Company Raise Enough Money

People usually treat this as 100% and only look at Day One close relative to offering prices as the maximization function question. And while yes, managing the ‘pop,’ is part of this, it’s an overly narrow view. In an IPO the company receives a sum of money equal to the share price they debut at multiplied by the number of shares they sold — aka the float (hold aside the cost part of the equation for now. You can potentially get a high share price by constraining float but that’s more akin to a private offering than public one where you’re looking for the market to price your business. You can also sell a ton of the company to the public, trying to find the true market price for demand.

Rather than focus on just share price though, let’s look at the amount the company raised. Was it a meaningful total, at a price better or equal to what they could have received on the private markets, and how does the company intend to use the proceeds. That’s a harder question than just a “did the stock go up or down on Day One” but it’s the question we should be asking.

25% Did the Company Set Itself Up Well for Year One Performance

One public company CEO I know, upon seeing the pop in her stock during offering week looked and said privately “I didn’t sign up to deliver those numbers.” Meaning, she knew the Year One performance required to sustain that valuation was beyond the company’s likely results over the next quarters. A lot of the IPO is about positioning for Year One stability — meeting your numbers, potentially doing a secondary offering, getting your employees and venture investors incremental liquidity, etc. The early trading performance and expectations set during the pricing and road show need to align with a post-IPO strategy.

5% Did the Company Take Advantage of the IPO as a Marketing Event

You get a lot of press and chatter from your initial filing all the way through to the ‘CEO rings the bell’ story. How well did the company manage to tell their story? Did they build momentum and goodwill or trip over their shoes?

5% Did the Company Prepare Employees Sufficiently for Post-IPO Life

I was at Google for their IPO. We watched it go public and then went back to work. Sure we all cared about the stock price but I think generally the founders and management did a nice job of setting expectations that this was a milestone not a conclusion. Some early folks on the business side started quitting as lockups expired and they found themselves with millions, or tens of millions of dollars, but there wasn’t an exodus. A strong post-IPO HR plan includes communication, retention grants/etc, helping employees get access to trusted financial advice and so on.

Am I Right?

So are these the four areas to focus on and are they weighted properly? I don’t know but would love to hear from folks like Dan PrimackKatie RoofLise BuyerBill Gurley and Jessica Lessin.

I’ll use feedback to adjust these categories and weighting and then later this week, or early next week, we can score airbnb and DoorDash.

Notes and More

Happy Chanukah this week!

📦 Things I’m Enjoying

COVID’s second wave rattling the US means that small businesses are going to have a really challenging holiday season. Here are three of my Bay Area favorites that ship: Ritual Coffee Roasters3 Fish Studios (art), and Bitters & Bottles (alcohol, can be shipped within CA).

🏗 Highlighted Homebrew Portfolio Jobs

Boom is building a supersonic aircraft. No, seriously, they are. Quite credibly and quickly too. It’s a well-funded, A+ team that is growing across a number of functions. Look here for jobs and you can tell your grandchildren you helped build this plane!