2019 will almost certainly be the year where rideshare millionaires become a thing. Also Pinterest millionaires. There’ll probably be some homesharing millionaires, too, as well as at least a smattering of fake meat millionaires. This is because, after several years of dormancy, the tech IPO — which stands for initial public offering — is about to make a triumphant return.
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If you’re unfamiliar, an IPO is the first time members of the public can buy a company’s stock, and this process can make a lot of people very wealthy, seemingly overnight (usually early investors and employees). The day that Facebook IPO’d back in 2012, about 1,000 employees became millionaires, reported Business Insider at the time.
Similar transformations will happen later this year as first Lyft, but also likely Uber, Airbnb, Pinterest, Palantir, and Beyond Meat are all expected to go public, Kiplinger’s reported. There’s going to be so many of them, the Wall Street Journal now says that companies like Pinterest are even trying to move up their planned dates to avoid getting lost in the noise.
If you follow tech and enjoy money, there’s a good chance you’re going to want to get in on it. But there are several caveats to IPOs that regular folks need to understand before they try dipping their toes into these waters. You don’t want to wind up like this guy.
Why the IPO Hype Is Real
What’s now being called the “unicorn stampede” could kick off as early as next week, when the ridesharing app Lyft is expected to file the paperwork to set an IPO price. Unicorns are (or were) private companies that are valued at $1 billion or more. In the last few years, unicorns have gone from being incredibly rare to almost the standard. As Bloomberg’s Matt Levine points out, people began to fear that, if the country’s most innovative companies weren’t going public, everyday folks were losing out on the chance to get in on the profits.
As these fears turn out to have been unfounded — and the rest of the tech unicorns follow in Lyft and Pinterest’s footsteps, San Francisco is expected to “drown in millionaires,” as the great Nellie Bowles put it. With at least one of these big tech IPOs, there will almost certainly be news segments about the receptionist who “stumbled into being employee number four” and owns a yacht now.
It’s important to avoid letting this environment cloud your thinking, Doug Boneparth, a certified financial planner and frequent financial pundit, tells Inverse.
“By and large, we tend to remember the IPOs that were the superstars and anchor our beliefs to them,” Boneparth explains. “So much so, that we’re willing to forget the actual statistics and outcomes of how IPOs actually do.”
Boneparth is alluding to the fact that most IPOs don’t do that great. For every Facebook, there’s a Pets.com, a company which during the dot-com boom IPO’ed in February and was bankrupt by that November, Investopedia notes. According to data assembled by Jay “Mr. IPO” Ritter at the University of Florida in 2016, the average market adjusted return for IPOs over the course of the ensuing three years is -17.8 percent.
Why is this? Part of it is just that IPO companies are still very new companies, and less established companies are less predictable and less scrutinized. But another problem with IPOs, at least for regular people, is that it’s very, very hard to actually get your hands on said stock at the actual IPO price. The Wall Street Journal reports that Lyft will IPO at around $65 a share. But that’s what the bankers, the brokers, and the funds who want to be first in line will pay. (In the industry, this is called a “pop.”)
This is not to say that investing in IPOs is bad. In fact, on the other hand, there’s a great learning premium to investing in a company you know, like, and actually understand. Perhaps more importantly, investing in an IPO is more exciting. People will actually be talking about it.
While you’re probably better off simply adjusting the contribution to your 401(k), toggling a contribution rate from six to seven percent isn’t going to teach you very much. (It’s a great thing to do, though. I swear!) Buying a few shares in an industry you believe in, and that pundits will be talking about and picking apart on the news, is a great way to learn (just don’t confuse this with being a great way to make money).
A balanced approach is best. If you are inclined to try IPO investing, Boneparth recommends investing around one percent at most of your investable assets, and being comfortable with the notion you can lose it all.
“If you have $100K to invest, and you allocate $1,000 to an IPO, I don’t think its success or failure is going to greatly impact your overall outcome,” he says. “When you accept that you have unlimited downside, but if you’ve limited your exposure to that 1 percent, perhaps you’re going to be delightfully surprised when your expectations are exceeded … assuming you can limit the amount you kick yourself for having not invested more.”