I’m not against non-alcoholic beer or the ‘sober curious’ movement that has been prevalent in the global shift towards healthier and more mindful habits as of late, but I do enjoy an occasional cocktail every once in a while, so I don’t subscribe to either ideology. In the summertime, I’m more of a lemonade and reposado tequila kinda guy but if beer is the only thing on tap, you’ll find me reaching for a hazy IPA probably over an IC Light (sorry Pittsburgh, please don’t disinherit me). We know IPAs have extra hops. Hops act as a natural preservative and these IPAs were originally created this way so the beer wouldn’t spoil on the long sea voyage to British troops and colonists in India. Hence the Indian Pale Ale.
I’m not trained medically and I have no business telling you how healthy or unhealthy anything that you ingest makes you. I’ll leave that to your doctors and more likely your Instagram feed. What I do know is that we’re in for a summer full of IPOs between OpenAI, and SpaceX, and Anthropic, and maybe some others. More likely the question that you might be asking of us is simply ‘Are any of those healthy for my portfolio?”
I feel much more qualified to answer that question, but that still comes with some caveats. If you asked a doctor about your IPA habit he would probably ask about quantity. I too, would ask about the quantity of your IPO habit. If you asked a doctor about your IPA, she’d certainly ask about the context of the habit. I would too. How does it fit into the entire picture? Is it the basis of every drink you consume? In much the same way is it the basis of every investment you make? A doctor would likely point out the fact that there are certainly risks involved, even in moderate IPA drinking. There are things that can go wrong the very first time. There are things that can go fine the first few times and then suddenly turn into disaster the third time. This is true of IPOs as well.
IPAs and IPOs share another common denominator. They both often show up at a cocktail party. It’s always interesting to me how often we’ll hear questions about the latest private company that is about to go public at a social gathering. People are fascinated with these things. It’s generally ok. I could make the case it’s even generally good. Buzz and news and conversation about how a company or product is going to solve a problem in the world is why capitalism and the stock market exist. It’s why earnings get produced and it ultimately is what drives corporate profits and shareholder returns. It’s a good thing when the problem is big enough or the solution interesting enough that people talk about it at a social gathering. The caution comes when it crosses the line to FOMO. The fear of missing out can cause us to do all kinds of things that are detrimental to our well-being…IPAs and IPOs included. If your desire to be included in an IPO has its basis and major building blocks in the fear of missing out, I’d suggest waiting on the investment. That’s usually a bad place to begin an investment path. Go back to the previous sentences. Is the problem big enough. Is the solution interesting enough. What is it about this private company that is about to go public that no one else can or will be able to do? If someone else will be able to do it, how long until they can? If you have some good answers to those questions, then maybe there is some room on the path to proceed. If those answers are bad and the only answer you have is because your buddy Joey is doing it….well remember all the dumb things Joey did over the last 20 years, too? Which side of the ledger do you think this decision fits?
If you’re thinking about this space there are two other things that you should wrap your brain around as your finishing your IPA and thinking about it.
The first is survivorship bias. It’s evident in the graphic for this blog, although you might not recognize it. I’m making the case that the one-day IPO performance for five well-known companies should be paid attention to less than the 10-year performance of those five well-known companies. But what about all the other companies that went public in those same years? They aren’t even on the chart. Don’t forget that. Take, for example, 1980. In 1980 you had the choice between two unknown computer companies that did an IPO. One was named Magnuson Computer. The other, Apple. One has a device in half the country’s pocket 50 years later, the other finished their final meeting in 1983. That final meeting wasn’t in their office but instead was in bankruptcy court. Hope you chose correctly. Survivorship bias. There were 232 other companies that went public in 1980. Ninety of them are also out of business. Another 40 merged into some other company or conglomerate. Survivorship bias. Be careful of IPO charts and graphics. Don’t forget about the graveyard of companies that aren’t on the chart of success you’re looking at.
The second thing to be aware of is that the landscape has undoubtedly changed over the last 50 years in the IPO space. Private equity, hedge funds, private capital, and institutional wealth have all increased in size and influence. This is not to say that a company cannot go public and continue to generate outsized returns and shareholder wealth over time. I believe wholeheartedly in the public stock market. I think companies can and should go public. I think there are benefits to doing so. That can be true, and at the same time, it can be true that it is different than it was in 1985.
I have no idea where this summer of IPOs will take us. I don’t have a crystal ball and I can’t tell you with any degree of certainty where SpaceX, or Anthropic, or AI in general will be in the next 7 days or the next 7 years. I know there are some challenges out there. I know there are some companies that will rise to the top and meet those challenges while making a profit and the shareholders of those companies will be rewarded for risking their capital. That’s how it’s always worked. That’s how, I believe, it will continue to work. If you’re considering IPOs this summer, make sure your decision is driven by conviction and fits into your plan, rather than conversation. If you’re unsure, let’s have an IPA and talk about your situation.