Why the Day One IPO ‘Pop’ Is Overhyped

The current class of 2020 IPOs make a strong case for more direct listings

Image: Busakorn Pongparnit/Moment/Getty Images

After a delayed start, the IPO market is heating up again as companies look to resume going public. This recent spate of IPOs — Agora, Vroom, ZoomInfo, and Lemonade — has resurfaced the familiar occurrence of the “IPO pop,” where companies’ initial share prices see large increases relative to their original IPO price on the first day of trading. The recent class of 2020 IPOs has seen its stock price go up, sometimes by multiples, in the first few days of trading.

This pop is often billed as a positive trend and a marker of a successful public debut because of the jump in shares, which increases the company’s overall market cap value. But these IPO pops can actually shortchange companies of capital and result in dilution, reducing each share’s intrinsic value. Here’s what the IPO process looks like and what the 2020 data of the current round of IPOs tells us about whether these pops are in fact a net positive for the company or more of an overhyped trend.

The IPO process at a glance

Companies choose to go public for a multitude of reasons, including:

• raising capital (though this is arguably a less important factor for companies that can access the capital available in private markets)
• offering liquidity for earlier-stage investors and early employees and/or founders
• gaining more credibility with potential future employees and/or customers
• instituting discipline throughout the organization, since going public creates more transparency and accountability with quarterly earnings

When a company plans to go public, it hires bankers who serve as intermediaries. The bankers help craft the S-1 prospectus for the company, which narrates the company’s story and informs the public about the future prospects of the company from its current business model, competitive landscape, and pricing methodology. The S-1 form, which is filed with the SEC, includes an initial pricing range for the stock and an initial volume of stock the company intends to sell, or capital it plans to raise in the offering.