The rise of special purpose acquisition companies (SPACs) and a boom in initial public offerings (IPOs) over the last few years provided opportunities for individual investors to get in on the ground floor of dozens of promising companies. But what impact did the rise in small investor participation have on those public-company hopefuls?
In this clip from "The M&A Show" on Motley Fool Live, recorded on March 25, Motley Fool contributor Jason Hall discusses how the landscape has changed for companies looking to go public, and what the future may hold for those companies and their investors.
Jason Hall: One of the things that we saw over the past three years, maybe longer, it's been longer than three years, but a lot of disruptive companies that in the past would not have gone public at that stage of their growth went public. Were still very, very high cash burn that went public because there was a ton of investor capital that was willing to go into that risk. It's clearly backfired. I think backfired is probably a fair description because of there's been so much devaluing. If we go back to I guess it was a little over a year ago, guys help me if it was a year or so ago when we had so many public issues that happen. We had Snowflake and Roblox was scheduled to IPO. That was late 2020, if I remember right. What we saw was through that IPO process, there was a mania where the company would set the IPO price and then like a week later that price was 50% higher. Then when they announced the date of the IPO, like the actual final IPO price may have been double when they started that whole process maybe double.
Travis Hoium: Well, you would see the same thing with SPACs, too. A SPAC would go up 50% just on rumors that they were going to merge with some company.
Hall: Then the other part of it, too, was that so there was that IPO price and then the first trading price. When you've got the price that the IPO buyers buy at, which was double what the company was hoping to get, and then when it actually starts trading 20, 30, 50% increases from there, just that absolute mania that was being driven by public demand that was largely unsophisticated investors. We're not talking about angel investors that understand those risks of investing in these start-up businesses, where you're funding companies that are going to just absolutely incinerate cash in a race to get to some sort of a scale before any other competitors get there. You introduce that into public markets and a lot of those stocks are down 30, 40, 50, 80%. I promise a lot of them are not going to recover, Travis, because exactly what you were just talking about, a lot of these industries, we're going to see one or two big winners and a lot of losers because that race to get to scale is not going to pay off and you can't make money unless you get to a certain level of scale. I think this is really informative for a private business that this is happening because it's a reflection or maybe an echo of everything that's been happening in the public markets with so many growthy cash-burn stocks.
