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Private-to-Public Payoffs

To our Valued Investors:

For about two-and-a-half years, Iron Edge VC has been distributing weekly newsletters. Most have focused on individual pre-IPO investment opportunities, and others have featured more generalized commentary on the broader private company marketplace. At the beginning, about thirty email addresses were copied and pasted into the “bcc” field of our Gmail account and the brief update about Pinterest’s successful IPO or rumors of Palantir going public was let loose. Today, with a growing distribution list nearing 5,000 recipients, we need to employ a Customer Relationship Management (CRM) system, which also allows us to jazz things up with our company logo and some kind of relevant image like the one you see above. Also, the essays are three or four times longer. Don’t roll your eyes; some people like to read.

Whether you are new to these updates or have been here for the long haul, we thank you, and we sincerely hope that you have been enjoying what we put out there every week. Our goal is to inform you about the finer points of the private companies to which we offer access, and to raise interest in and awareness of the pre-IPO market.

As the Iron Edge community continues to expand, we have noticed that our accredited investors and our accredited potential investors come from wonderfully diverse personal and professional backgrounds. Far from being limited to those with professional experience in finance, we cater to doctors, lawyers, entertainers, athletes, retailers, and many other vocations not directly related to Wall Street. While we would be content to know that you have valued the experience of learning more about companies like Udacity, Orbital Insight, NextRoll, xFold, and many more exciting private innovators, we recognize that you might not fully understand what we offer at Iron Edge. With that in mind, today we would like to cover the basics.

When an enterprise is in its earliest stages of development, public awareness of the business and general understanding of its operations are, naturally, quite low. If the company has a great business model and it’s adept at making things work, it will typically begin soliciting private funding. This money comes from well-capitalized investors who specialize in the potentially lucrative practice of early-stage financing. As the company grows and begins to produce meaningful revenue, it attracts more of these early-stage venture capital professionals into subsequent funding rounds. Each funding round increases the company’s valuation, thereby generating FOMO and becoming a “hot item” in the private arena. It’s something of a self-fulfilling prophesy. When the company’s valuation crosses the $1 billion mark, it becomes a “unicorn” --- a rare, magical beast that can make your wishes come true. That’s when name recognition and the interest of a broader range of potential investors really begin to perk up. It’s also when your friends at Iron Edge VC have traditionally put a sharper focus on it, although we have been developing a knack for getting in before the company truly catches fire, much to the benefit of our clients.

After some years of maturing, a company might decide that it’s time to “go public”, or, to make its shares available for everybody in the free world to buy. The most common way of doing this is through an Initial Public Offering, or IPO. The IPO process starts with the selection of an underwriter, usually a big investment bank like Morgan Stanley or Goldman Sachs. The underwriter assists with the creation of brand-new shares in the company, and then takes those shares on a “roadshow”, selling allocations of the company’s equity to mutual funds, broker-dealers, insurance companies, and other investment banks. Then, the underwriter sets a price for the soon-to-be-public stock. On the appointed day, the company debuts on a platform like the New York Stock Exchange or the NASDAQ to much extravagant fanfare. Then it simply keeps trading day after day from that point, like McDonald’s, Exxon Mobile, Microsoft, and more than 600,000 other companies around the globe.

After an IPO, insider stockholders are restricted from selling their shares for a specified period of time, usually 180 days. This insider lockup period is designed to prevent excessive supply from suppressing the stock price. In most cases, company insiders and early VC investors acquire their shares in the years before an IPO at much lower valuations. The temptation to lock in a juicy profit at the expense of a newborn public listing’s ticker might be too much to resist. The lockup period safeguards against such undue immediate selling pressure.

A less common method of going public is called a Direct Listing, also known as a Direct Public Offering, or DPO. This is when no underwriter is hired, no new shares are issued, and the company offers already-established shares to the public. Although a DPO lacks the safety net of the underwriter’s attention and the financial support garnered from a roadshow, it is a significantly less expensive process. It is usually also free from the lockup period, as insider shareholders are customarily permitted to liquidate their positions on Day One, thereby providing the supply that would have otherwise come from an underwriter’s newly created shares in an IPO. Last September, Palantir made its own DPO rules by allowing only 20% of its insider shares loose on the first trading day while keeping the rest locked up for six months. The approach injected some complexity into the transition for many insiders, but it also had the intended effect of allowing the price some room on the upside. Last month, one of Iron Edge’s more recent significant investments, Amplitude, Inc., announced that it had confidentially filed paperwork for a direct listing. Amplitude’s founder and CEO, Spenser Skates, is a believer in the DPO, so we look forward to learning how soon the company’s shares will be freely tradeable on the public market.

Of course, private shares may also become public by way of a merger. Publicly traded Callaway Golf Company (NYES: ELY) had owned 14% of privately held Topgolf when it decided last year to buy the rest of the sports entertainment outlet. After the acquisition was finalized, private Topgolf investors simply had their positions converted to ELY shares.

One other way of making a public debut that has been the topic of much discussion in recent months is known as a Special Purpose Acquisition Company (SPAC) Merger. Also known as a “blank check company”, a SPAC is nothing more than a management team, usually consisting of well-regarded business veterans with impressive track records, with no stated business model. Simply put, a SPAC is a very sophisticated shell company. The SPAC will raise funds purely on the merits of the management team, and then list on an exchange where it can be traded by the investing public. At some point, the SPAC will announce a privately held takeover target, and after shareholder approval it will merge with that company. For the company that’s absorbed by the SPAC, the experience of going public is nearly frictionless, especially as it sidesteps the labor-intensive roadshow and the grueling and expensive paperwork associated with other ways of entering the public markets. SPACs were front-and-center at Iron Edge VC when highly regarded venture capitalist Chamath Palihapitiya’s blank check company IPOE set its sights on Social Finance, Inc. We already had been offering SoFi shares at very low levels for a couple of years by then, and IPOE’s strength and Chamath’s pedigree confirmed that we had a winner. After the brief 30-day lockup period expired, our clients received 1.74 shares of the new listing (Nasdaq: SOFI) for every private SoFi share they owned after carried interest. On transfer day, we learned that many of our investors had been unaware of this conversion multiple. Some called us to inform us that we had made an error and sent them too many shares. It’s hard to describe how good it feels to tell a client that there was no mistake, and that the unexpectedly larger return was in fact what that client was meant to receive.

With that foundation, consider what Iron Edge does. We started as a late-stage private equity investment fund, primarily focused on relatively well-known unicorns like Palantir, SoFi, Topgolf, and AirBnB. We initially did not invest in earlier-stage startups, and we found much success with the model. As we evolved, though, our relationships with private equity-oriented family offices and with top executives at private companies expanded and diversified. Our strategies matured into finding the opportunities that lie within companies situated in earlier phases of their growth cycles, and then leaning into the ones in which we detected the highest potential. We learned everything we could about these companies and passed along that knowledge through the weekly newsletters. While it’s true that we can provide access to just about any private company out there, we direct most of our attention toward the ones in which we have the sincerest confidence. Every kind of investment involves risk, of course, but at Iron Edge VC our goal is to identify the best pre-IPO opportunities and make them available to a well-informed clientele. We establish funds that represent ownership of the large blocks of private shares we acquire, offer them to our clients, and anticipate that they will go public via IPO, DPO, conventional merger, or SPAC merger at a higher valuation.

We are asked, with great frequency, “what is the timeline” for a specific company to go public. While there are often rumors in the press, clues in the company’s financing history, or even suggestive comments from generally reliable company insiders, the simplest answer is usually “we can’t say for sure”. Private companies enjoy a level of secrecy not available to those that are publicly traded. They are under no obligation to let you know anything about their long-term plans regarding anything, including the prospect of an IPO. If a CEO gives a hint by dropping a phrase like “within the next year” that is, of course, a great sign. But don’t despair if the big boss utters the dreaded phrase, “no plans”. In December 2011, Mark Zuckerberg had “no plans” of bringing Facebook public. Then, a mere five months later, Facebook was logging massive volume on the Nasdaq Exchange. It seems, sometimes, that those in power take pleasure in keeping us guessing.

We at Iron Edge VC are proud to have access to a wide variety of private companies’ shares before they go public. If you would like to learn more, or if you know of anybody else who would, do not hesitate to contact us by clicking “Get in Touch” below.

If you have enjoyed this article, visit the Iron Edge Blog for past updates on other pre-IPO investment opportunities.

As always, shares are available on a first come, first served basis.


All the Best,

Paul Maguire
Founder & Managing Partner

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