Facebook goes public and its stock declines. Commentators write that investors should have known it was overpriced. Twitter goes public and its stock pops. Commentators write that the company left money on the table. Not nearly enough people though remark on how crazy it is that companies still go public the way they do. Three years ago I wrote a post saying that I was hoping we would see IPO 2.0 and unfortunately I am still waiting.
What do I mean? Building a complete order book upfront and allowing retail investors to participate in that process directly. This is entirely possible with today’s technology. People place limit orders to buy through their brokerage account all day long – but we use this only for companies that are already public. The same mechanism could be used to build a book before a company is public.
This would be desirable for two reasons. First, a complete book would make pricing the IPO way easier because it would reveal much more information about the shape of the demand curve. Second, this would give retail investors direct access without the allocation game being played by the intermediary banks and brokers which still (again) direct on the basis of the relative importance of customers to them.
Now is a good time to remind everyone that this isn’t hypothetical but that in fact Google did go public this way. My previous hope was for another company to have the same courage that Google did. But maybe it is time for regulators to wake up and make the direct IPO mandatory. The current gatekeepers for the process unfortunately have no interest in real change and this is an oligopolistic market where we cannot sit around and wait for competition to solve the problem.
