IPO lockups

Jordan Hayes jmhayes at j-o-r-d-a-n.com
Wed Mar 22 18:15:28 PST 2000


From dhenwood at panix.com Wed Mar 22 14:50:40 2000

The general picture is consistent with the established fact

that IPOs are in general lousy investments; the presence

of a venture capitalist seems to be a marker for extreme

lousiness. Assuming VCs to be "smart money," who would want

to buy what they're selling?

This seems to miss the fact that different people have different risk parameters; VCs sell because the expected return at that point is outside of their risk parameters. Institutions buy in the IPO and in the secondary market afterwards because they finally do fit their risk parameters. This is a perfectly logical progression.

Everytime someone buys and someone sells, there doesn't have to be a "smart" side and a "stupid" side. They both can be achieving their goals. Sometimes it's true: there certainly are a whole slew of loser IPOs. But it doesn't always work that way.

Look at it this way: a VC buys at $1, sells at at $15 IPO; institution buys 1/3 of their long-term position in the IPO for $15, other two thirds on the way to $24. Stock goes to $28 in two years. Both groups are heroes to their clients.

/jordan



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