IPO Mania: Tricky Investments and Long-Term Strategy

If you have been paying attention to the stock market at all these last few months, odds are that you’ve seen skyrocketing IPOs that seem to defy all logic. Snowflake (SNOW) IPO’s at $120 a share, then closes at $254 after reaching $319 at its highs. Lemonade (LMND), a tech/insurance hybrid, opened its big day at $29 and traded to highs of $64—a 132% gain on the day. These are the kinds of jumps investors dream about seeing once a year, let alone in one day.

Even in the midst of the deepest economic crisis we’ve seen in decades, IPO’s are having a banner year. September was one of the best months on record for IPO funding, and all signals are pointing to an October defined by the same astronomic impact. In fact, IPO tracker Renaissance Capital found that IPOs this year are enjoying 2.5x more first-day pop than the historical average. These head-turning debuts are exactly what financial bloggers and stock market reporters salivate over, creating headlines that catch even the most casual investor’s attention. Pair that with the meteoric rise of easy-to-use online, app-based brokers like Robinhood—which has an $11 billion valuation itself—and you have a recipe for quick success (and in many cases, ensuing disaster).

Gains of this magnitude can paint a rosy picture over a rough canvas, highlighting the outliers while ignoring the true reality of the underlying economy. This primes amateur investors and get-rich-quickers to enter into IPOs purely based on the initial event, ignoring the inherent value of the company and long-run considerations. As I have frequently cautioned in the past, investing with a long-term time horizon in mind beats fast, speculative trades. Every. Single. Time.

As a venture capitalist and entrepreneur, I’ve long pursued opportunities in the economy of the future. At Spectrum Business Ventures, we see the world differently, closely monitoring the preferences of young consumers and emerging market trends to gain footholds in the firms and products that will come to define our economy in ten, fifteen, or twenty years—even if doing so means incurring short-term losses. I urge aspiring investors to do the same.

IPO deal hunters have the right idea—they just need to refine their approach. Investing in IPOs requires meticulous research and assiduous reading of market trends. Rather than funneling this energy into boom-and-bust stocks, though, look for the ventures promising to deliver innovation for the long-run.

FOMO-induced surges

The allure of 200 percent overnight gains has attracted many aspiring investors, and while some may have realized gains from these one-day pops, most are being dragged down by the subsequent crashes. As the legendary Jim Cramer says, you never have a gain until you actually take it.

Take hydrogen-powered vehicle company Nikola (NKLA), for example. After a significant run-up to $80 a share in early June, very shortly after its IPO, the stock now sits at a cool $24.15. This means that there are some people out there who got trapped at $80/share who are now sitting on nearly 75 percent losses. Those who bought at the top were not making decisions based on long-term considerations—they were jumping in on a short-lived rocket ride.

Shades of 2000-2002

The 2020 IPO landscape is demonstrating remarkable similarities to the tech melt-up of 2000-2002. Driven by simple online investing, unrestrained optimism, and manic buying, the current valuations of some tech stocks have soared through the roof.

I urge aspiring investors new to the stock market to look toward fair or underpriced businesses whose products or services have the potential to change the way we live. Some of these IPOs even have these traits, but make sure you are getting a good deal on any stock you get into. And if that means pinning the stock to your watchlist and buying in after a sharp decline, then waiting is the way to go.

Those in search of lucrative IPOs have the right idea—they’re searching, ultimately, for innovation. But I caution aspiring investors to look toward the long term. Search not for lucrative stocks to purchase for cheap and sell at a profit a few weeks later, search for the ventures and opportunities that are popular among young consumers and in emerging markets and that deliver innovative new products or services that improve peoples’ lives. Investing in these opportunities for the long-haul is when venture capital truly becomes worth it.