How Initial Public Offerings Work

With all the hubbub this week regarding the initial public offerings of both DoorDash and Airbnb, it’s a great time to go over exactly how IPOs work and see how this particular sausage is made.

“How do IPOs work?” is a question I get asked all the time, so this will help you understand what people are talking about when a company goes public. 

How IPOs Work

The first thing you have to understand is companies like DoorDash (NYSE: DASH) and Airbnb (Nasdaq: ABNB) go public and issue stock to raise money. But with that also comes a lot of negatives, so there’s also a secondary reason they do it: They want to sell out in size — they want to grow!

They take the bad with the good because in the long run, it’s worth it. If you’re the founder or an executive of a company and you own a lot of stock, until you have an IPO, it’s hard for you to have a big “liquidity event.”

What does that mean as far as how IPOs work?

Well, that liquidity event is where a company can sell a lot of stock and make a lot of cash in one shot. So, yes, these people are just like you and I. They want to cash out while the market is hot… the same way people want to sell their house after seeing their neighbor get a crazy good offer on their home. 

There’s a little bit of greed involved. 

And here we are in December 2020 with two massive IPOs in Doordash and Airbnb. And the reason for that is this: The market is so bullish this year — especially for tech, growth companies and unicorns — we’re in a growth and greed regime in investing… and society in general. 

And in this kind of environment, there’s a sense of urgency for companies to get their deals done now. As the old saying goes, you have to strike while the iron is hot… and if we’ve learned anything in 2020, it’s that things can change on a dime. 

These two companies would have gone public in November if not for the presidential election… and then the vaccine news… and so now they just want to get it done before the year is over — now is the time. 

So that’s the motivation behind why companies go public. 

Check out my short video below and let’s chat about exactly how IPOs work. Then be sure to leave your questions and comments below if something is unclear, and I can address them in a future mailbag segment! 

As always, send your mailbag questions to jeff@joyofthetrade.com.