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Score (Another) One for the Good Guys

To our Valued Investors:

Imagine that you are the CEO of a large, privately held company that is valued in the billions of dollars. Your board has elected to go public via direct listing, allowing your company to bypass the time and the expense of hiring investment banks to underwrite an IPO for you and to conduct the road show that will sell your newly-issued shares. You’re taking the direct route (ergo “direct” listing) by allowing your existing shareholders like current and former employees, early VC investors, and visionary Iron Edge VC clients to sell shares immediately, without a lockup period. Spotify, Slack, and Roblox created instant liquidity for their cherished insiders in this fashion. Yesterday, Amplitude, Inc. joined this prestigious and expanding club. Now, as the leader of a large imaginary private company about to list, you are asked to provide something called a “reference price”.

You are familiar with the concept of IPO pricing. This is the elaborate and thought-intensive process that investment banks employ to come up with a price at which a company should first list its shares. Much significance is assigned to this number, largely because it is the price at which institutions acquire their shares before an IPO. Set it too low, and a large portion of the subject company has been handed off too cheaply. Set it too high, and the market might have difficulty sustaining the level, and the newly public company will suffer some immediate reputational damage and ill will when its biggest new shareowners are left holding the bag. The direct listing reference price, on the other hand, is largely ceremonial. Its most important function is to serve as something of a placeholder, or a statement like “We kinda think that the stock should trade around this figure”. It’s often vaguely representative of the company’s most recent funding rounds, but it has little association with current reality. Unlike an IPO pricing, it does not necessarily represent what anybody actually paid for a stock.

Now, with this understanding, Ms. or Mr. CEO of Acme Widget Corporation, how would you like to come up with a reference price? Will you toss out a number that suggests a valuation three times the size of your most recent funding round valuation in the hope that the buying public will be tricked into reaching higher and paying up to the new level? No, you probably didn’t make it to the top spot at a pretend company by making such foolish calls. More likely, you will set the bar low with a modest reference price. That way, when the financial news outlets do their reporting, your company will appear to exceed expectations. Palantir (NYSE: PLTR) priced their direct listing one year ago tomorrow at $7, which turned out to be nearly 30% lower than PLTR’s real-life 52-week low. Now trading over $25, PLTR appears to be utterly destroying its reference price. Yesterday, Amplitude (Nasdaq: AMPL) showed a $35 reference price, and it certainly didn’t disappoint when it opened at $50 and went up from there to close at nearly $55. This, mind you, all taking place on a day when the market was getting hammered.

For your friends at Iron Edge VC, the expectation-managing reference price of $35 was the inspiration for a few emails and phone calls from concerned investors. They had been hoping for more of a “pop”, and were generally disappointed with the $35 pricing. Of course, as you now know, this “pricing” wasn’t based on anything real, and the handwringing was all for naught. The impressive $50 opening tick also happened to be the low mark for the day yesterday, closing near the $55 level, and today AMPL has been holding quite steady around the $54 level, avoiding the selloff some might have expected after such a stellar debut. At no point yesterday or today were any investors who bought our Amplitude pre-IPO series anywhere close to being in the red. This has been another decisive win for the entire Iron Edge VC community.

  Founded in 2012, Amplitude produces a highly effective digital optimization system. Their expertise lies within the retention of established customers and making the online experience with a corporation as agreeable as possible. Amplitude’s Artificial Intelligence (AI) protocols take decision-making responsibility away from emotion and instinct and place it in the virtual hands of the more reliable algorithm of historical customer behavior. Over the course of any given day, the hundreds of millions of customer “clicks” across the broad spectrum of business websites and apps yield priceless data. The way people behave, or, what they choose to view and how long they linger on specific parts of a website, combined with information about the customer’s profile like age, gender, and geographic location, tell an important story. This story is far too complex, and it evolves much too rapidly, for any human being to interpret and utilize with an acceptable measure of satisfaction. Like Silicon Valley’s legendary AI giant Palantir Technologies, Amplitude’s programs improve with constant use as they learn volumes from countless trials. The result is, for all of Amplitude’s many clients (which include Microsoft, Twitter, Under Armour, Burger King, and more than a thousand others at present), the ability to passively monetize the actions of their own clients. Whereas a large company would, in the past, experience internal conflict between its own marketing, sales, and product development departments that are jockeying for influence on how a company’s public face should look, Amplitude unveils the recipe that creates an evolved customer experience that fosters loyalty, thereby placing the bottom line (increased revenue) as the top priority.

Even though Amplitude’s new status as a publicly traded company renders it “no longer eligible” to be included as an Iron Edge VC investment opportunity, we have great optimism for their future growth. Amplitude came onto our radar early last spring, and we first told you about it in a newsletter like this one (Amplifying Digital Results, May 5, 2021). In that essay, we shared, “…it appears very likely that Amplitude is looking at a tsunami of business. Using data compiled through November 24, 2020, peer-to-peer web review site G2 ranked Amplitude as the top product analytics software in terms of satisfaction and market presence. Amplitude has the largest market presence among providers of product analysis. What’s more, 98% of users rated Amplitude with 4 or 5 stars, and users said they would be likely to recommend Amplitude at a rate of 90%. Figures like these suggest that at less than ten years old, Amplitude is a relatively young company that is just beginning to realize its massive earnings potential. It is the kind of opportunity that we at Iron Edge VC love to sniff out. The Information Age began decades ago, but Amplitude is positioned to redirect this fascinating era into exciting and unexpected places.”

Not to put too fine a point on it, this is why we take the time to send out these communications on a weekly basis. It’s also why we sincerely hope you take the time to read them. Before a company makes it into one of these newsletters, it must spend time under the microscope of our seasoned professionals who know how to find potential value. Can we guarantee great returns, or even any returns at all, on a given investment? Of course not. Anybody trumpeting such assurances is really waving a red flag. We can guarantee, though, that we take our due diligence very seriously. We only become deeply involved with the investment into a private company after we are very comfortable with the company’s growth prospects. If a “great” private company is saddled with a grossly inflated pre-IPO valuation, we will avoid it like the plague. If a young startup’s financials display magically disappearing revenue that suggests that the founders blew the seed round on Lamborghinis, we will politely take a pass. If a “hot” company has a mediocre management team, we will know about it. If, on the other hand, we spot a lean and smart disruptor flying under the radar (and there are plenty of those), we will pounce on it. This is why all of that talk about AMPL’s $35 reference price didn’t even cause us to break a sweat.

We at Iron Edge VC are proud to have access to a wide variety of private companies’ shares before they go public, and we make those shares available to you through our multiple investment funds. Today, we are very pleased to extend our sincerest congratulations to the Iron Edge VC clients who placed their faith in us by investing in Amplitude, Inc. through our Funds. Of the many offerings we presently maintain, we exercise the same demanding level of standards as we did for Amplitude. 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 pre-IPO opportunities and commentary on early-stage investment in general.

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

All the Best,

Paul Maguire
Founder & Managing Partner

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