With frenzied retail investors flocking to get in on the next big IPO, it makes sense that other investors would be interested in getting in on IPOs.

Early investors in startups are looked upon with favor because they more often than not become rich after a successful IPO. And many investors want to follow in their footsteps and replicate their success with IPOs.

Because today’s IPO market is filled with new and innovative new companies who are bringing new ideas and technology to the public, there are many pros and cons to IPOs that you must understand. IPOs come in many flavors, across many different industries, and there are many factors to be evaluated carefully by the individual investor before you consider investing.

In this post you will find information to serve as a starting point for your own investment into IPOs as part of your overall investment plan.

Remember, before you make any investment, check with your own financial advisor to determine if investing in an IPO is right for you.

Getting started with an IPO

Every year, dozens of companies take their companies public, making millionaires out of the early investors who own IPO shares. On opening day, trades worth millions are made possible for most of the IPOs.

The problem is finding them… uncovering the golden nuggets from all the lackluster IPOs. This is why you should do your research to determine the value of an IPO. Incredibly, with a few hours of analysis, you can determine the value of the IPO, and determine if it has the possibility to hit it big.

Best of all, the research and documentation are all publicly available to all investors before the IPO. As you’ll see, these are available to you free of charge from online databases. We’ll tell you where and give you some great questions to start with.

If you want to find winning IPOs without spending time on the duds… If you want to give prepare yourself with a set of questions to jump-start your analysis, and if you have been thinking about an IPO, and investing in one, then this is going to be the most important thing that you’ll read today.

History of IPOs

Until the the tech boom in the 1900’s, few people had heard of an IPO, much less witnessed the large potential that stood behind them.

During that boom, tech IPOs became the darling of Wall Street, the media, and the public investors clamoring in to get in on the next big thing.

Since then, there’s been dozens of additional tech companies that went public with an IPO and then grew to giants. Google and Facebook both fall into that category.

In 2020 and 2021, there was a record number of IPOs, totaling over one thousand. Many months saw dozens of companies going public. But the history of IPOs go back much further than most people know.

The first “IPO-like” occurrences happened in Roman times. In Rome, there were member owned entities called publicani. These were legal bodies and members held shares of the company. These shares were sold to other investors in a public market in the Forum, near the Temple Castor and Pollux. The value of the shares fluctuated in value, encouraging speculation and wild price swings.

Much later, the Dutch issued the first modern IPO. In March 1602, the Dutch East India Company offered shares of the company to the public. This was the first company to be listed on a public stock exchange.

In the United States, Bank of North America was the first company to offer the first IPO around 1783.

Do IPOs make investors rich?

When the financial news touts a big IPO and the big returns, it’s hard not to want to get in as an investor.

For example, here’s just a few returns on early investments into IPOs.

-Shares in Tesla jumped over 2,100% since the company first went public

-The video conferencing company Zoom shot up 1,000% higher from it’s IPO

-Social media giant Facebook gained over 600% since its IPO

But keep in mind, despite these big wins, some IPOs are not so rosy.

The financial highway is littered with roadkill from IPO’s who made big promises but were tossed aside by public investors who didn’t see value.

When thinking of the downside of an IPO, consider the quote from Warren Buffett. He says, “It’s almost a mathematical impossibility to imagine that out of the thousands of things on sale on a given day, the most attractively priced is the one being sold by a knowledgeable seller (company insiders) to a less-knowledgeable buyer (investors).”

Before You Invest – A few factors to consider when reviewing an IPO

Before you choose to invest in an IPO, here are some questions to ask. These questions will give you a head start on your due diligence and will give you a solid understanding of the company you are considering.

-What is the company’s main product or service they are selling?

-Who is the management team? What is their background?

-Is the industry of the company growing or shrinking?

-How does the company position itself against it’s competition?

-List the competitive landscape of the industry.

-How does this valuation compare to similar companies in the?

-Who are the current customers/clients of the company?

-What is the company business model?

-Can the competitors easily copy the company’s offerings?

-Has revenue and profit been increasing or decreasing?

-How much debt does the company carry?

-Has the debt load been increasing or decreasing?

Much of this information is available in a public document that the company files with the SEC. It is made available for investors before the IPO opens.

If you are interested in investing, this document provides you with the background material you need for your research. It isn’t prudent to invest in an IPO without doing your research. Don’t rely entirely on media reports or the hype of friends. Do your own research.

With your own due diligence in hand, then you can determine whether rewards outweigh the risk of the investment.

IPOs that blew up

Through the summer of 2021, 591 IPOs and SPACs in Canada and the United States have been launched. There were 630 in the entire year of 2020. That’s 1,221 IPOs over 18 months compared to the 1,535 IPOs that happened for the five years prior to the start of 2020.

Here are a few of the best performers:

BioNTech SE BNTX is a top-performer. BioNTech is a German-based biotech that partnered with Pfizer Inc. last year for the development of a COVID-19 vaccine. The IPO opened on Oct. 1, 2019 and returned 1,477% from its opening price to the close on June 22.

Moderna Inc. MRNA, another firm that developed a coronavirus vaccine, had a great showing, with a total return of 862% from it’s Dec. 7, 2018 IPO launch.

There were plenty of other IPOs that did well, including Cloudflare, CrowdStrike Holdings, and Nio, an electric-vehicle maker.

IPOs that fizzled out

To demonstrate and many IPOs fizzle out, let’s take a trip back to the tech bubble era. Let’s start with the most famous IPO of them all.

Pets.com – At the end of the 90s, Pets.com was thought to be one of the new leaders in online commerce. It had a sock puppet mascot and a catchy slogan: “Pets.com. Because pets can’t drive.”

When Pets.com went public, it had one of the worst IPOs in history. It initially brought in $82 million, only to have the share price drop to $.22. Apparently, Pet supplies cost money to ship, so eventually economic reality caught up with the sock puppet and beat him to death with the clever slogan.

Webvan.com – Webvan.com was an early online grocery delivery service. It guaranteed delivery of your order in under 30 minutes. The IPO made $375 million in 1999, at the peak of the tech bubble, only to have the company goes bankrupt a year and a half later.

Groupon – At it’s peak, Groupon hit one billion dollars in sales in record time. At the IPO, the shares went public at $20 but dipped to under $5 in just over a year. Again, economics caught up with mania. Small businesses owners realized they couldn’t survive giving their services away at deep discounts. And the people who used Groupon were notoriously bad at tipping, often being more of a troublesome complainer, than a happy patron.

IPOs: Risk and Rewards

To understand both the risk and reward of an IPO, you must remember that new IPOs are new companies. They have a short track record and only a short operating history. This makes it difficult to determine their actual value. Determining value is also challenging if the industry the company is operating in is still growing. The digital software market was new and still developing in the 1990s. Today’s most popular IPOs are operating in industries still developing, like A.I., ride-sharing, electric cars,and space technology.

The best way to gain insight about how the company truly works is to review the public registration documents filed by the company. These documents are required by the Securities and Exchange Commission for all new companies and are called Form S-1. They must contain specific information for investors, including company information, financial information, the business model, risk factors and information about the industry. These documents are found in the database on the SEC’s website, and you can find it using the search function on the website.

If you want to find out if the IPO is likely to fizzle out or might hit it big, then your first step is to download those documents and analyze the information in it.

Subhead – Final

As you can see, there are pros and cons to investing in IPOs. Be sure to follow the information in this to begin your own analysis. And be sure to consult a professional financial advisor for additional advice to answer any further questions you may have.

As you can see, when an IPO takes off, it can bring you an oversized returns with even a modest $1,000 investment. The investors who got in early on the IPOs of Amazon, Facebook, and Google are likely millionaires today.

There are many IPOs launched each year, so if you do your own due diligence about the companies and you might be able to uncover the next big IPO winner.

An IPO is a process in which a company offers its shares for sale for the first time to the public. Companies prefer to go public because it means they can access more capital. However, going public also has its risks.

The price that you pay when buying a share during an IPO is called the offer price or issue price. The issue price formula is determined by taking the total number of shares issued and dividing them by the total number of shares available for sale, then multiplying by the number of shares being sold to come up with a percentage figure.