Shares of Agora, a China and U.S.-based "real-time engagement" API company, soared today after it went public.
Yesterday Agora priced 17.5 million shares at $20 apiece, up from its target range of $16 to $18 per share. The firm raised $350 in its debut, or around 10 times its Q1 2020 revenue and is now amply capitalized and has runway for effectively forever, given its modest cash consumption as an ongoing concern.
But while the debut was a success, seeing Agora's share price rise as quickly as it did was not universally popular. Regular critic of the traditional IPO process Bill Gurley -- a venture capitalist, so someone with a stake in this particular gambit -- weighed in:
Pretty amazing that there is a financial exercise on this planet involving hundreds of millions of dollars where its OK to not even get to 50% of the actual end result. The process is so rigged/broken at this point. They missed by more than the original guess. #marketpricing pic.twitter.com/MqmmYRw3ZM
Let me translate. Gurley is irked -- rightly, to at least some degree -- that as Agora opened at $45 per share, the company's IPO was awfully priced. By that we mean that the company should have sold its IPO shares not at $20, but at $45, the value at which the market quickly repriced them.
As $45 is more than twice $20, its bankers "missed by more than [their] original guess." Given the number of shares the company sold, the mis-pricing could be worth up to $437.5 million!
There's merit to this argument, but it's not as complete a slam dunk as it might appear. Chat with CEOs of public companies and they will tell you about how important it is to have steady, stable, long-term shareholders of their equity. Those you might, say, meet on a roadshow and get to invest in your IPO shares.
Those groups -- the long-term investors that tech folks claim to love so dearly -- are likely a bit more price conscious than the momentum traders eager to find upside in recent debuts. That is, folks more likely to hold onto shares for a shorter period of time.
So, if you want long-term shareholders, you may have to price you IPO under the price the market may initially bear once trading begins.
Still, holy shit $20 per share is not close to $45. Gurley has a point.
Change may be coming. The Agora news rotates back to what the NYSE, an American exchange, is doing. Namely trying to come up with a way to let companies direct list (to just start trading, sans pricing or raising new capital), and raise capital. This gets rid of the issues that Gurley highlighted above. At least in theory.
Obviously, if that model becomes possible and long-term investors are willing to pay for shares in a slightly different manner, the new method will be far superior than the old for companies that are great. What sort of companies get burned from first-day pops the most? I reckon it's the most attractive, or hyped companies.
The companies that would make the most attractive IPOs would use the new method, leaving -- what? The detritus to go out the old-fashioned way? Signaling issues abound!
Anyway, it was a zany first day for Agora.