Technology IPOs Poorly Valued While Lemonade and Agora Double Their Beginnings


Technology evolves at a distorted speed during the coronavirus pandemic, but the IPO process is blocked.For a second consecutive week, a technology company more than doubled in value when it first started trading. Last week, Agora, a Chinese cloud software developer, jumped 150% on its first day of trading on the Nasdaq. And Thursday, technology insurance company Lemonade jumped 139%.

IPOs in technology have long been criticized for a process that allows investment bankers to deliver undervalued stocks to large public fund managers, who often benefit from immediate and massive pops before ordinary investors can participate. Meanwhile, the issuing company ends up raising far less money than it could.

Over the past four months, with face-to-face meetings, IPO roadshows have become virtual. Management teams, with the help of bankers, sell their stories on Zoom rather than spending two weeks traveling to financial centers in New York, Boston, Baltimore and San Francisco.

Although they can save money on travel, they always leave loads of money on the table. Lemonade sold 11 million shares at $ 29 a piece, bringing in just over $ 300 million and giving new investors the difference of $ 444 million, based on the closing price of $ 69.41. This is a big problem for a company that had about $ 567 million in cash and cash equivalents before the IPO.

“They ignore demand when they price. It’s on purpose, “said venture capitalist Bill Gurley of Benchmark in a text message. ‚ÄúThis problem is systematic. Because the system is down. ”

Gurley, who was among the most skeptical of the IPOs, posted a tweet on the same subject after the IPO of Agora, expressing his amazement “that there is a fiscal year on this planet involving hundreds of millions dollars where it is acceptable not to even reach 50% of the actual end result. ”

A Lemonade spokesperson declined to comment, and an Agora representative did not respond to a request for comment.

In a video interview last week after Agora’s IPO, CEO Tony Zhao told CNBC that the “roadshow went well” and received good feedback from 30 to 40 groups of ‘different investors. Zhao attended meetings from China while chief operating officer Reggie Yativ traveled to Silicon Valley, where the company also has a strong presence.

“They encouraged us to stay focused on the long term and said they appreciated our strategy,” said Zhao.

Agora software powers communication systems and allows developers to easily integrate video or voice tools into their applications. Sales nearly tripled in the first quarter to $ 35.6 million, with demand coming from customers facing a surge in online communications linked to Covid.

Agora raised approximately $ 350 million in its IPO for stocks that, at the end of the first trading day, were worth more than $ 880 million. The stock went from its initial public offering price of $ 20 to $ 50.50 on the first day, and closed Thursday’s session at $ 56.49.

“At the macro level, you have huge optimism about the future of technology,” said Glenn Solomon, partner at venture capital firm GGV Capital, which is an investor in Agora. “At the micro level, it’s a challenge. You have bankers trying to price the offers on the basis of a reasonable valuation multiple as the market pays for new names and growth. “

Solomon, who voiced his views via text, said he agreed with Gurley on the need for a “better system where the market can price IPOs more effectively.” Gurley has tried to get companies to follow Spotify and Slack in their direct searches, allowing existing investors to sell stocks at a break-even price.

Lemonade has valued its IPO at $ 29, having previously increased the range from $ 26 to $ 28 from $ 23 to $ 26. The top prize, however, valued the company at $ 1.6 billion, below a private market estimate of around $ 2 billion last year.

Lemonade’s sales more than doubled in the first quarter to $ 26.2 million, in part because, with consumers stuck at home, the company is designed to automate the shopping experience insurance and to allow company representatives to draw up remote insurance plans. Lemonade has artificial intelligence robots called AI Maya and AI Jim to handle customer calls and complaints.

“Our customers’ experience with Lemonade is also not affected by the turmoil, as AI Maya and AI Jim chat with customers, wherever they are, without raising concerns about social distancing,” said the company in its prospectus.

“Uncertainty always brings a discount”

Matt Oguz, a Lemonade investor, was not involved in the price of the deal or the roadshow, although he said the process went “very fast” and there were a lot of interest for new investors. Raising more than $ 300 million in times of economic and financial turmoil is a huge feat, he said, even though prices were not on target.

“Uncertainty always comes with a discount,” said Oguz, a partner at Venture Science. “On the one hand, you get a lot of money up front. On the other hand, if a pop like this occurs, you can leave money on the table. ”

It’s not just about pop music from day one, said Lise Buyer, co-founder of Class V Group, which helps start-ups prepare to go public. A lot can happen in the months that follow, which can lead to an increase or decrease in the stock.

While the buyer acknowledges that “too many companies seem to be leaving too much on the table,” she said other factors come into play in pricing, including management’s efforts to reflect employee morale. and potential risks to the business.

“Just because a stock can go up in a volatile and volatile market doesn’t mean that we currently have the higher price sustainable,” the buyer said in an email. “Because management teams must be accountable to their employee base, they often choose to set the price at a value that the fundamentals support, as opposed to the price that the market wants to pay today. One can only really say that if a deal has been seriously misjudged if the opening price of the market persists several months later. ”

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