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The X's and O's of IPOs

By Joey Solitro - Updated Oct 10, 2019 at 9:19AM

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Our analysts explain the IPO process, from deciding to go public to being traded on the exchanges.

In this week's episode of Industry Focus: Tech, host Dylan Lewis and Motley Fool analyst Joey Solitro answer some listener mail about IPOs -- specifically, why some banks apparently have the ability to email their customers about buying new IPOs before the public has a chance to trade them. Is that allowed? How? Why? Tune in to learn in depth how the IPO process works, the various parties involved and how their incentives do and don't align, some best practices for investors to employ when getting in early with an IPO, how to think about investing in an IPO before the public, and more.

To catch full episodes of all The Motley Fool's free podcasts, check out our podcast center. To get started investing, check out our quick-start guide to investing in stocks. A full transcript follows the video.

This video was recorded on Oct. 4, 2019. 

Dylan Lewis: Welcome to Industry Focus, the podcast that dives into a different sector of the stock market every day. It's Friday, Oct. 4, and we're going through the X's and O's of the IPO process. I'm your host, Dylan Lewis. I've got Motley Fool Premium analyst Joey Solitro with me in the studio. Joey, you are quickly becoming a regular here on the show. 

Joey Solitro: Hey! I wouldn't have it any other way!

Lewis: It's great having you on! Today we're going to be talking about an email that we got from a listener. Andrea wrote in and wrote to us and said, "My broker recently offered pre-IPO shares of Peloton two days before it went public. It's the first time this has happened. I wasn't aware it was even possible for a lowly individual like me to get in on an IPO." She goes on to explain that she did some homework, and decided Peloton was a no for her, but wound up having a lot of questions after this whole process. She writes in, "This made me wonder a bit about how IPOs work. Maybe there will be a next time with my broker. As it's never been an option for me before, I've never looked into it, so I don't understand the whole process. For example, why so many changes last minute? How is it that WeWork got one pulled last minute? Why do they never know what the IPO will be priced at until the last minute? Etc., etc.? It seems surprising to me that there aren't stricter rules around this."

It led you and I to think, "Wow, we probably haven't ever done anything that breaks down how the IPO process works and why there is so much vagary around the process up until shares actually price and hit the market."

Solitro: Yeah, there's a big gap between when companies say, "Hey, we're thinking about going public in the next 18 months," and then you hear, "So-and-so has filed confidentially." And then you finally see the paperwork. It's a very long process. Some investors get lost along the way. But it is very complex, so it does deserve the time that it takes.

Lewis: So, this is going to be a timeline of what that process looks like. Hat tip to Andrea for making this episode happen. 

Solitro: Thank you, Andrea!

Lewis: Listeners, if you have stuff you want us to talk about, we love getting ideas for shows. Please write in. 

What ultimately kicks things off with the IPO process is the company saying, "OK, we're going to go public." Usually, this is an internal discussion. Maybe they're getting some pressure from investors, saying, "Hey, guys, are we going to have this liquidity event?" Typically, management will make this decision, and you'll start to see some staffing changes if it's a younger company that has a slightly less experienced management team.

Solitro: Yeah. In today's day and age, if you're a tech company, or any company in general, when you raise cash, you are going to go public eventually. It's just in the cards. It used to be, the first three to four years, then it became more like seven years was the standard. Now, you're seeing even 10 to 13 years. But as soon as you take that venture capital money, the clock's ticking. Companies know, "OK, we're going to be going public eventually." After the seed round, they'll have round A, B, C, D, E of their funding. But then you'll start to see the staffing changes, like you mentioned. Usually they'll hire a CFO that's been in the position to take a company public before. You'll see them hiring a lot of people in the finance department because they need to get those financials in order to be able to pass the test of a big investment bank.

Lewis: A lot of people will look at the job postings for some of these hot start-ups and say, "Oh, they've got a lot of accounting positions. They've got a lot of finance positions open. Is it possible that they're going to be weighing an IPO down the road?"

Solitro: I do that quite often. I'm one that buys a lot IPOs. I'm always in touch with all the different unicorns as they're coming public. I'm even an accredited investor, to where I'll be looking at a lot of these companies trading on secondary markets, where insiders are looking to dispose of some shares to get liquidity themselves. I'll always look -- are they hiring a new chief financial officer? Have they recently hired one? What was his background? Oh, he took this company public. Or, oh, she was over here. And then, of course, yeah, that led to an IPO. So, yeah, that's one that I'll definitely look at, mainly in the finance. If they have a lot of engineer openings, that's very common, because they're spending to grow right there. But yeah, always look for those finance and accounting positions because they're getting those numbers in order for a reason. 

Lewis: And then basically, you will see the paperwork start to happen, right? You hire the people that can make that paperwork happen, then you start putting the paperwork together. The form that we tend to pay the most attention to is the registration statement, or the S-1; very often, you'll hear us call that the prospectus.

Solitro: Yes. That's the initial one. That's the big document. It takes them quite a while to get that in. It's almost the most intense background check you could ever run on a company. They not only want to know every dollar that's been accounted for in recent years, but they want to know all related party transactions, they want to know everything you've done, and who you've done it with, to lay it all out on the line. 

Lewis: It used to be that this was a document that, when filed, was pretty quickly available to investors. That has changed a little bit. You'll see a lot of news reports around this. A lot of the financial media will follow this and say, "Oh, we're seeing these hirings. It looks like it'll happen at some point in the next year or so." Often, the company will even indicate, like, "By 2020, we want to be public." And then you'll see that news break that says that WeWork or Peloton or Lyft or whoever confidentially files an IPO registration statement. And you're like, "Well, wait a minute. How come it's confidential?" That's because of a lot of the changes that came in with the JOBS Act, recent legislation around emerging growth companies, and now just all companies. If you see that confidential filing, there's nothing shady about that. It's just the new process for IPOs. 

Solitro: Yep. That's where you can almost make a note of it, put it on your watch list. I always take a sticky note and slap it on my computer among the other hundred that's there, and just know, keep checking different websites, see if that's finally available. But yeah, filing confidentially is the name of the game these days. Don't think that's too shady. Just know, it'll become available in the near future. 

Lewis: The reason that exists, that confidential filing, it's supposed to be a pro-business move. If you have to make your books public, there are competitive disadvantages to doing that, especially if you're in a highly competitive industry. If going through the IPO process puts you at a disadvantage relative to companies that are currently private, it may disincentivize companies from doing that. So, they made this confidential carve out so that more companies would be incentivized to go public.

Solitro: Yeah, because you're actually listing major customers of yours, who represents what percent of revenue. If one customer represents over 5% of revenue, it's in there. So, then your direct competitor could be like, "Hey, we'll beat them on price. Let's call so-and-so at this company that we know." Or, you usually put in who your technology partners are. If you're a smaller start-up that like, "Wait, how does Lyft do this, exactly? Oh, wait, they're partnered with this company." Yeah, it's only a couple of weeks, and they can't do a lot of damage up to that point, but you are almost telling all your secrets without telling your secrets.

Lewis: We probably need to rope in the bankers at some point during this discussion, and explain the underwriting process a little bit. You have the paperwork that is put together. Very often, you have underwriters that are helping put that paperwork together.

Solitro: Yeah. That's pretty much what they do. These big financial institutions, it's all they do. They're going through your filings, making sure everything's there. If there's corrections that need to be made, or something that was forgotten -- if they're going to put their name on it, it's going to be perfect, and they're going to charge you a lot of money for it.

Lewis: The way I liken it is, you have a real estate agent when you buy a house. You are not buying a home very often, if you're the average person. Companies do not go public very often. Even if you're a seasoned executive that has taken companies public several times, maybe you've done it three times. So, you're going to bring in an underwriter -- a Goldman Sachs, a Morgan Stanley, someone who specializes in this -- to make sure that you're doing it correctly, the same way that you would bring in a real estate agent if you're buying a home.

Solitro: Yeah. It's pretty much like you're paying for the relationships that they have. You not only want them to go through all of your filing to make sure that it's perfect; but then, they usually have relationships with the NYSE or the Nasdaq, and they have relationships with all these other investment banks that they need to partner with to actually sell your shares to, to have them sell to their clients. So, yeah, it's almost like, you know what you want to do, but you need that middleman to help you do it. 

Lewis: So, as that's going on, very often, you'll have the bankers begin reaching out to some of their industry contacts and saying, "Hey, we're going to be handling this deal. We want to gauge your interest." In the lead-up to the company actually going public, that'll more formally take root as the road show, where the management team and underwriters go out and meet with all of these banks, big institutions, people who have a lot of money to throw around, and give them the pitch on what the company is.

Solitro: Yeah. Not every company is someone that everybody knows. With Zoom and Slack, most people in the industry knew them. Almost everybody's using Slack, it seems, these days. Not everybody has the reputation to just come public. A lot of those companies, when they don't need money, that's when they can do a direct listing. But most of the time, they're smaller companies. They might not be in a cash crunch and need it, but since they want to go public -- not everybody knew what Datadog was. They needed to have that investment banker go around and say, "Hey, here's everything that's on there." So, yeah, they'll put together that roadshow presentation. You'll see the growth that the company's got. And then, usually, after that roadshow, those people go back to their clients. And that's where you start gauging demand.

Lewis: Yeah. It's an important part of the process because they're taking feedback from every one of those presentations and getting a better sense of what the market appetite might be for shares.

Solitro: Exactly. OK, everybody loves tech companies, everybody loves subscription revenue. Datadog coming, I'm sure the demand there was very high. But in other situations -- if it's, like, a small biotech that's trying to cure cancer, where there's hundreds of those, and they don't always work out, there might be far less demand for that. Those might be specific funds, or specific people that want to have their hat in the ring with those.

Lewis: If you're listening through this, you might be saying, "Well, wait a minute. All of these high net worth individuals, all of these big institutions, they're getting access or information that I'm not. When do I get my hands on the filing? When do I get to see the core business results?" If the company ultimately does wind up going through with the IPO, just over two weeks before that happens, the S-1 is no longer confidential, it winds up becoming public. At that point, that's when you and I wind up getting our hands on this thing and digging into it for, like, an Industry Focus episode.

Solitro: Exactly. That's where a lot of things take a turn for the worse. There might have been incredible demand for WeWork, for example, until that S-1 came available, and everyone starts looking through it, combs through it and sees, "I don't like this, I don't like this." Then they start realizing, this is a real estate company trying to trade at a tech company valuation, and people see through the smoke. And you saw retail investors absolutely turn on them. That forced the investment banks and everybody else to take a second look, like, "OK, maybe we don't want to be participating in this." That's when you see the valuation start coming down and down and down. As soon as that S-1 is released, that's where the real demand can be seen. Then you'll get the financial media all over it. That's where things can really unravel for a company.

Lewis: Yeah. I wish that we could get our hands on this earlier. I understand the process, with the confidential filing and why it exists. There are some good reasons for it. I do wish that we had a little bit more than a couple of weeks of lead time. But the way the news cycle works, very often, we're able to get out the important stuff in that amount of time. But, these prospectuses are 200 pages, 300 pages. It's a lot to work through in a short amount of time and really do your due diligence, especially if you're looking at things like related-party transactions, or some of the moves that may make you scratch your head and wonder exactly how the incentives are aligned for a business.

Solitro: Yeah. Like you said, some of these are 250 pages long. I've gotten to the point where I know the sections that I want to see. As I've said before, I always have a generalization of what a company does, but then I'll always look at the numbers and then go back to it. It's almost like backing into what the company actually does. I like to let the numbers speak for themselves. But then, yes, like you said, you want to go through those related-party transactions. OK, the CEO's brother and sister own a cleaning company that cleans this entire building that they're headquartered in, and, wow, they make $250,000 on this contract. But then you have to look -- what's the average cost to do that? And it might be legitimate. It might be three times the normal amount. So, yeah, there's a lot of combing through. I would love to have my hands on it as soon as the investment banks do. But what can you do?

Lewis: Yeah, sometimes you just have to wait. The thing that you will tend to see during the lead-up, the couple of weeks ahead of the IPO, is a price range emerge. This is getting at one of Andrea's questions. How is there a range on this thing? One of the important things to remember with the IPO process is, you're taking something that is fairly illiquid -- you're taking a valuation that maybe is updated once a year or twice a year, if they're going through a ton of capital-raising events -- and then you are trying to set it to something that the market will respond to, and liquidity will be like that, it'll be available all the time, and the price will basically reflect the current attitude in the market. It's a very difficult thing to do.

Solitro: Yeah. With the whole price range, you have to understand that as these companies raise money over time, they're going to have different share counts, and it's going to be a different share price on those. There might be a $2 billion start-up that, its last raise was $4 per share. Or, you've got Airbnb that's pushing $30 billion, and their share price is over $100. We know share price doesn't really mean anything, but what that share price range is usually based on is the last time they raised capital, and if they believe that they should be trading at a premium from that. If the last capital raise was of $1.2 billion, and it was $6 a share, hey, we might want to go public at $2.4 billion and $12 per share. But that's where you'll get the range, so, $10 to $12. But then, as they proceed on that road show, they see the demand -- like, wow, this is going to be well oversubscribed, we're going to bump up that range, maybe $14 to $16. And if the demand is still there, they might even raise it again. But that's where the whole price discovery comes into play.

Lewis: Yeah. You said oversubscribed. That means demand is higher than supply. You'll also hear undersubscribed. If you're about to go public, that's not a word you want to hear. Basically, it means that demand for shares is lower than the supply that you are looking to sell. Those are the types of things that will push shares to price above a range, below a range, in the middle of a range. If it's exactly what they expected, well, you're probably going to end up dead in the middle of the range. But it can be a little weird to look at it and say, "Well, they're saying $17 to $21, but they priced it $25." How does that happen? 

Solitro: Yeah, that's the thing. If demand's where you're setting your range, or below, like you said -- if there's 10 million shares available, and only five million, so you're undersubscribed, there's a very good chance that will be postponed or completely withdrawn. Or, if you've got demand for 20 million shares and you're only bringing 10, that's where you'll see that price range go up. So, it's almost like you want to water down the demand. It's almost like they don't want to leave too much money on the table, but they still want that first-day pop because it looks good in the market. 

Lewis: This gets into the incentives of the IPO process, which we've talked about a little bit. You have a company that is trying to raise money. They're giving away equity, trying to raise money. It's a capital-raising event for them. It's also a liquidity event for its shareholders. You have an investment bank that is facilitating that process, collecting fees on that process. Very often, they have a commitment to own a certain number of the shares as part of the offering. And they are facilitating the entire offering by connecting the company with their high net worth individuals, or these institutional clients that have huge budgets and have an appetite for these. The underwriting banks don't want to sell a dog to their high net worth individuals. They want to be giving them a good investment opportunity. Their pricing might be a little conservative so that there's some upside. The company is saying, "Well, we're raising capital and giving away equity. We want to make sure we're maxing out this valuation." Those can sometimes be at odds with each other.

Solitro: Yeah. This is where it comes into play, where the big investment bank is thinking for themselves and their clients, as well as this company they're bringing public. They want to get them liquidity, but they might not give them every dollar that they're worth because there still has to be room for that demand to be there. If they start contacting their high net worth clients, saying, "Hey, we're going to bring this public. We think there's going to be significant one-day pop, a pop on the first day," it's almost like that's their incentive for helping bring that company public. 

I always like to say, if a company comes public and I like it and it goes down, they just didn't leave any money on the table. But in a market psychology sense, they want that first day pop because then you turn those traders into long-term holders. A Beyond Meat comes public and just rages out of the gate. They did leave quite a bit of money on the table. They could have priced it higher. But maybe the demand didn't say it was there. They priced at a range that they thought was reasonable for them to raise the money, and the people that got that allocation, wow, they must be happy.

Lewis: Yeah. To be clear, some management teams want to see that first-day pop, too. They love the publicity of saying, "Oh, shares are up 25%, 30%," whatever it might be. Conversely, if you price it to perfection, and it's a 0% move, it's pretty ho hum. Or, some management teams will wind up with a "broken IPO." The financial media loves saying "broken IPO." That means that shares are below where they priced. Yeah, that meant that they price their equity and maxed out the value, but there's a lot of negative press that comes with that. You have all these people are weighing all these different things.

Solitro: Yeah. It's very good to get coverage from the big media outlets where, "Oh, this first-day pop of 58%!" Say you price your IPO at $20. It doubles on day one to $40. Then, when it pulls back to $39 and change, or drops to even, say, $31, people might think, "Oh, wow, that's a steal. It's down x%."

Lewis: And it's still above whatever they priced at originally. There's still that positive momentum there. It's all to say, the night before the IPO, you'll generally see the offer price be solidified. If you are on the receiving end of some of this information from your bank, maybe they're trying to prove their value to you and offer you some access to some of these IPOs. You'll see a range often, and then maybe a more solidified price if you decide to commit to buying some shares. But very often, if you are making that commitment, you're doing it at a range rather than a specific price.

Solitro: Yeah. So, you'll pretty much get a solidified range, and they still might price $1 above that range. But this is where Andrea was talking about, where her broker gave her access to it. How that works is, these underwriters will have relationships with brokerages or with these other banks. I know for a while TD Ameritrade and Charles Schwab had deals with Goldman Sachs, to where anything they were underwriting, they would get a specific amount of shares. I read that Fidelity has a deal with Credit Suisse. Depending on who your broker is partnered with on the investment banking side, you might get that notification. "Hey, if you want to participate in Peloton's IPO, here's the projected range," you could say how many shares that you would like to purchase, and at what range. You have to have that cash sitting in your account to do it. They won't let you do that on margin. That's when, it's almost like account value comes into play. Even though they'll tell you differently, I got one of my brokers on the phone, and I was like, "Look, I need you to be honest with me. How does this work?" If you say, "I want 1,000 shares," but your whole broker is given a million shares to give among their clients, and you want 1,000, but your account might only be $150,000, they're going to give it to their clients with several million dollars. They say that they go in 100-share spurts, like they'll just keep going around so everybody gets a bite of the pie. But I don't believe that for a minute. I feel like they're giving big allocations to their most important clients and it's whittling down. But, you indicating that interest is how they gauge demand. So, then they could price it and say, "Yeah, we've got these amount of people." And once you're locked in, there's no going back. Once it comes that next morning, if you indicated interest in that thing, it might come to you.

Lewis: Yeah. Speaking of incentives, for these brokerages, it's a chance to give the people that have very large account balances with them that white glove treatment, and say, "Hey, we're going to give you access to this thing that only institutionals have access to, or only super high net worth individuals have access to via investment banks. We're going to get you in there." So, for them, it's a little bit of a marketing, client services thing.

Solitro: Yeah. That's more important than ever. The race to zero has officially come true. You've got TD Ameritrade, Schwab, E*Trade, everybody's $0 commissions. They've got to find more reasons to retain clients. If they can say, "Hey, we have access to this amount of IPOs this year, and we expect more next year," it's all about how to retain those clients. If having IPO access is one of those kickers, more power to them.

Lewis: If you do wind up participating in this, you will have the underwriter hook up your brokerage, and then the brokerage will deliver you those shares. You'll have where the shares price for that first offering. You have to remember, that's the primary sale. That's the capital-raising sale. Then, the morning of the IPO, you have a second phase of price discovery, Joey. 

Solitro: [laughs] Yeah. This is where the rich get even richer. You have that initial pricing. You might have a small allocation at those shares. But then they're still contacting different clients. They're all talking. That's when you get the CNBC coverage of the booth, and it shows everybody yelling at each other, like old school, "buy, buy, buy! sell, sell, sell!" type of deal. They're finding that sweet spot for those shares to open. That's when the really rich clients are sitting there, like, "OK, I got mine at $25. Early indications are $42." That's when they're licking their lips, waiting for that to open. 

The second price discovery is almost like, we found where the market demanded this, or where everything laid out, to where we think this is a good price to come public at. But now, let's find out what we want it to open at. 

Lewis: That's why, when the market opens, and it's day one of trading for an IPO, the shares will not immediately be available. They are going through this price discovery process to say, "OK, let's gauge interest on the buy and sell side, see what we can do here to get something that feels reasonable, maybe give some upside for these first couple of trades, and establish a market." Yes, the incentives at play are questionable sometimes. But also, it comes back to this, we are trying to put this in a position where it can participate in a highly liquid market where prices can move by the second, when the valuation for this company has been fairly static in six-month or 12-month chunks for its lifetime so far. 

Solitro: Yeah. You always have to remember, there are those circuit breakers in the market. If a company soars out of nowhere or plummets out of nowhere, it's going to hit a circuit breaker. Trading is going to be halted. If you had a company come public, and they open for trade at 09:30 AM, and all of a sudden, there's 10 million shares trading hands and the stock jumps 40%, you'd have trading halt after trading halt after trading halt. That early price discovery is more like, if it opens up $42, then, yeah, it might trickle down to $38, or up to $52. It's not going to be as significant as a move as that opening trade. But it's almost to keep everything in line and make sure they don't break anything.

Lewis: At this point, we are on the secondary market. All trades are not capital-raising events for the company itself. They exist between investors. If you buy shares in the first offering and sell them to me, you're the one that's pocketing that money. None of that money is going to the company. We are effectively on the Nasdaq or the New York Stock Exchange, and just transacting that way.

Sciple: Yeah. If you end up participating in the IPO, if you're an insider that's still holding shares, you're going to have that lockup period where you can't be selling. Or, I think how TD Ameritrade had it for me, if I was to participate in an IPO, I had to hold them for at least 30 days. They try to prevent you from doing it, but there's nothing to stop you once they're in your brokerage account. You could immediately sell it, and then they might make you not participate in a couple. I tried to participate in a bunch through TD Ameritrade. I never got allocated anything. I think our viewer that sent in the question, Andrea, you had an opportunity -- even if you indicated interest, there's a very small chance you would have gotten it unless you have a massive account. Then, hey, good for you. But, yeah, they do have that lock-up period to try to prevent too much selling. 

That's where the secondary reasons come into play. If you're Beyond Meat and you go public at one price, and out of nowhere, you're over $240 a share, and you want to raise capital again, that's where you can raise some significant capital.

Lewis: I think we've touched on most of the questions from Andrea's email. There's one more outstanding that I want us to hit. You got there a second ago. Should investors participate in that first round, if they're offered? What are the risks? I go back to what you were saying before about allocation. I think it really comes down to how big of an account you have, and how willing you are to put a decent amount of your assets behind something that is just going public.

Solitro: I'm almost always fully vested. It's more likely that I'll have some cash on my margin than there will be cash sitting on the sideline. I just think having money sitting there is a complete waste. So, for me, if I was going to participate one of these IPOs, I would have to sell something that I already own to indicate interest to my broker to then try to get some allocation. For others, if you have a lot of cash sitting on the sideline, and you really like the company, you've seen the financials, you really believe in it, that's where you might say, "OK, I'm willing to put 2% of my capital into this, or 1% of my capital." But then you have to factor in, if they're actually giving out these 100-share allocations at a time, you might indicate interest for $10,000 worth of shares and you're given $1,000. You have to be ready to purchase the bulk of your position after the company opens for trade. And then it's almost like, do I really want to have this tiny position sitting there like? Or, do I want to just watch the open, see what happens, and maybe buy at the opening trade? Or, kind of like I have with Datadog and other ones, watch it, see what happens, and buy it later on?

Lewis: My concern with this is people being pressured into a position where they're putting a little bit more behind something than they maybe want to, because they want to make sure that they get some of that allotment. If you don't have a very large portfolio -- say you have a $50,000, a $20,000 portfolio; anything lower than that, certainly, too -- you're going to have to put up or commit to probably several thousand dollars in order to have that order filled. That's going to be a big chunk of what drives your returns. If you think about diversification, making sure that you're not too weighted to any one position, that could put you in a tough spot, especially if, like we've seen with a lot of these IPOs, they wind up trading well below offering price a couple of months out.

Solitro: Yeah. That's where a lot of brokers have gotten better. They'll have account minimums to be able to participate in their IPOs. But not all do. But yeah, like you said, if you have a $50,000 account, and you decide, "I love this company," you don't want to put your whole account into that one company. Especially lately. It used to be, no IPO could do wrong. It was almost like everything that came public was popping 40%, 50% on day one and just keeps running. Now, it's almost like retail investors are getting smarter, combing through these releases. You saw from WeWork. That got pulled after. You saw changes in management, the valuation changed five different times before it got pulled. And then, even this week, there are supposed to be five biotech companies going public this week. Two got postponed or withdrawn. One priced below the range, one at the midpoint. You see the demand for IPOs isn't there like it was earlier this year or late last year. But it's almost like, yeah, these retail investors are starting to get smarter, combing through these releases, seeing what these companies really do.

Lewis: The way that I like to think about IPOs as an investor is, they're similar to being at a wedding, as someone watching the wedding, like a friend or a family member, especially if you're single. You're at this wedding. It's this big event, it's this huge proclamation of love. Emotions are soaring. There's this euphoria. While it seems really seductive in that moment, you have to remember, you have years of marriage after that. It's the same thing with the IPO process. You have all this fanfare, all this attention, all this hype around this company. They still need to be a good company day two, day 10, day 10,000. You can get in later as an investor. You don't need to feel pressure to propose immediately to your significant other just because you're at a wedding. Similarly, you don't need to buy shares just because it's going public. You can buy shares day two, when it's hit the secondary markets.

Solitro: Yeah. It still comes to play that these are coming public in the stock market. One bad headline out of the White House or anything like that, and the whole market starts pulling back. So, yeah, you see a lot of these great IPOs, or these great companies coming public, and it might rage out of the gate, but it pulls back with the rest of the market. Like you said, don't let the wedding day or the honeymoon be like, "OK, I didn't get in on day one. I have to get in on day two, or day three." Sometimes it's best to wait for that first earnings release. That's where a lot of pressure is going to be on that company. If you miss the mark on the first earnings report, you could be taking a 20%, 30% haircut.

Lewis: Yeah. It can be rough, especially if it doesn't line up with guidance. I think that's why we generally tell people, buy your positions in chunks. It's OK to get a tracking position in a stock that you're interested in, especially if it's small, early on. But remind yourself that you're buying maybe three or four times to build out the full position, rather than anchoring your cost basis to just one point in time.

Solitro: Exactly. IPOs are the ultimate "scale into your positions" play. There's other situations where you might want your full allocation right there. I'm definitely one that, if I love a company enough to buy it right at the open -- I don't always put a market order. I'll always have a limit order, right around where the indication's going to be. But, yeah, I'll never purchase the full position because I know, if it's going to pop 40% of the gate, it could end the day up 20%, it's still a great day, but wow, I just took a major hit. Always buying in those spurts. Buy some here, maybe wait until after the first earnings report. Don't let the whole FOMO thing get you. I think that's what got the IPO market as juiced up as it is, that fear of missing out. People need to just -- on IPO day, throw on that Taylor Swift song "You Need to Calm Down." Just relax, take a deep breath. I had to bring that one up because it's been stuck in my head all morning ever since listening to it on the ride in.

Lewis: [laughs] If we had the music rights for it, we should totally play that at the credits. Sadly, I think Taylor Swift's PR team might hear it and know that we don't.

Solitro: Same with for this podcast, that whole Friday, the most annoying song ever? If that was the intro song...

Lewis: You know what's funny? I haven't heard or thought about that song in about five years, and I'm going to have to listen to it after the show. Thank you for the great advice, and I hate you for putting that song in my head, Joey.

Solitro: Austin, can you do that for us?

Lewis: [laughs] Joey, thanks so much for hopping on today's show!

Solitro: Always a pleasure being here!

Lewis: All right, listeners, that's going to do it for this episode of Industry Focus! If you have any questions or you want to reach out and say hey, shoot us an email over at We'll probably use it for an episode. We love getting emails. I can't emphasize that enough.

Solitro: Ask a lot about IPOs and tech so I can come back. 

Lewis: Joey plug, right there. If you don't want to email us, you can tweet us at @MFIndustryFocus as well. If you want more stuff, subscribe on iTunes, or you can catch videos from the podcast and tons of other content over on our YouTube channel as well. 

As always, people on the program may own companies discussed on the show, and The Motley Fool may have formal recommendations for or against stocks mentioned, so don't buy or sell anything based solely on what you hear. Thanks again to Austin Morgan for all his work behind the glass today! Go Nats! For Joey Solitro, I'm Dylan Lewis. Thanks for listening and Fool on!

Dylan Lewis has no position in any of the stocks mentioned. Joey Solitro owns shares of Slack Technologies. The Motley Fool owns shares of and recommends Slack Technologies and Zoom Video Communications. The Motley Fool recommends Nasdaq. The Motley Fool has a disclosure policy.

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