How to get rich off tech IPOs 🤑

“Unicorns” can make regular people money too 🦄

The stock market has finally started to open up to new tech companies again. I would say the market is defrosting still and has not fully warmed up to tech. Largely, you can blame Yelp and Groupon for this.

Tech IPOs are still a great way to make money. All it requires is a bit of patience and common sense.

Be warned, listening to analysts who know as much about tech as your grandparents won’t get you far either.

Many tech IPOs have been disastrous. Even Facebook, the leader of this decade’s tech companies faced a terrible IPO. Of course it has since shot up in price dramatically.

Facebook is the perfect example of how the average person should approach stocks in tech companies, directly post-IPO. There tends to be a colossal drop in value, then a recovery period. From there the stock either skyrockets or stagnates.

This means that a tech company that experiences a poor performing IPO can still net you tons of money. Let’s take a look how.

Facebook has experienced quite the bounce back since its opening day

Opening at just under $40/share, Facebook was thought to be over-valued back in 2012. A disastrous spooked many investors. They would end up missing out in one of the best chances to more than double their money in years.

I recall being at NASA shortly before Facebook went public. I was having lunch with professor Vivek Wadhwa. Vivek, two entrepreneurs from India and I spoke to the Washington Post about Facebook’s interesting acquisition of Instagram. It was at that moment I realized how much of a steal Facebook’s IPO would be.

Facebook had yet to monetize its mobile platform. Back in the glory days people would flock to Facebook’s mobile app. Smartphones increasingly became the go-to device for the average person. More importantly, Facebook did not yet have ads on mobile. I pondered to myself just how much money could Facebook make if they ran mobile ads. Proudly, with a quick calculation I figured out what ended up being their first quarter revenues. The share price would explode afterwards.

It was a very rough road to that first quarter. Without getting into the complicated minutiae, Facebook’s IPO was such a disaster that NASDAQ had to halt trading to prevent the share price from plummeting further. Since this drama, Facebook has seen its price rise above $210 before taking a dive.

If you invested $10'000 around the time of the IPO and sold when Facebook crossed $200, you’d now have $50'000. That’s an insane gain in just a few years.

Moral of the story?

For high growth companies that genuinely do the ability to “turn on profits”, spend time and calculate roughly how much profits they can generate. If it ends up being a significant sum in the context of the company’s debt, buy the stock. You might not want to buy immediately unless the stock absolutely tumbles.

Even with this ugly chart, you could have doubled your money buying $SNAP

Snap is a slightly different story. Snapchat has yet to experience the same growth as Facebook in terms of user base or profitability. Still, Snap could have been an easy and quick path to doubling your money.

Snap has had it rough since going public. A constant revolving door of executives, getting copied by Instagram and the failure of its Spectacles has left the once admired company in shambles.

At $4.99, Snap was a steal to buy. While it’s true that Snap could have kept falling, factors such as its demographic, brand and even plain arrogance would have stopped Snap from falling too much lower. In just a few short months, Snap has double its price per share. It only took a few good signs in regards to its ad business, to bounce back.

Another important lesson.

When a tech company goes public and you want to buy shares, buy slowly. Gradually increase your position. This way if the share price drops after you buy, you can lower you average entry cost. A better approach is to buy after a large dip and sell after it recovers.

Twitter is proof that most people are clueless about tech companies

Twitter is no longer the darling social media company it once was during the Arab Spring. Still, companies like Snap wish they could be Twitter.

There are many reasons Twitter’s stock took a nose dive. Twitter always had management turmoil, long before the company was even mainstream. This shouldn't have scared investors the way it did. When Twitter’s growth slowed, this was a legitimate concern but investors took this as a sign of doom.

Through all of this, there were two huge, very obvious factors investors ignored:

1. You’re only as good as your competition. Twitter has no direct competition. This might sound counter-intuitive but it really isn’t. Think of anytime a big event happened, where did people go to talk about it in real time? From the Oscars, the World Cup or the latest Game of Thrones episode, people only speak about events in real time on Twitter. They speak with friends and complete strangers. This just does not happen the same way on other platforms. This is incredibly valuable to advertisers.
2. You don’t always need to acquire new customers to increase profits. Twitter could simply monetize its current user base better and make more money. This is also more cost effective as you spare yourself the customer acquisition costs.

Twitter of course benefited from the above and while it took quite some time for Twitter’s stock plummet, it did so then doubled its value.

More lessons.

Twitter hit the market in 2013 but did not truly plummet until 2016. Again this is an example of waiting as long as it takes post-IPO to buy shares in a tech company. Twitter also had very unique competitive advantages in a then hot space (social media). Take time to truly analyze each company and its’ competitors. Lastly, understand each businesses fundamentals. Some companies need growth to survive. Other companies are clever and can find new ways of monetizing existing products or services. Some are good at launching new ones. Understand before you buy.

The above scenarios were investor Cinderella stories. Let’s look at some disastrous IPOs and see what can be learned.

If I have to pick one stock that is a teachable moment and a caution for all investors, it would without a doubt be Groupon.

From $26 to under $4. What a trainwreck.

One of the most hyped companies of all time, Groupon claimed to be the fastest growing company and history. Growing fast for good reason, Groupon’s business model was to take $1 from a business owner and give users $2. This would never turn a profit. Moreover, business owners would eventually realize that the customers they offered huge discounts to would likely not return and pay regular prices.

Still, despite very publicly being caught using “massaged” numbers and non-standard models to present their financials, investors still rushed to buy Groupon shares.

Once investors realized the company’s business model was flawed, Groupon tried to change its business model. Changing models is fine if you’ve discovered some new huge untapped market, or you planned to do so for a long time.

For example, Amazon and Uber have planned to be logistics companies for ages. Amazon started off as an online book store and Uber is a ride sharing service. Amazon now is using its advanced delivery network to try and take on traditional carriers such as UPS. Uber is looking into clever ways of selling its location based data to help advertisers and deliver self driving cars.

Groupon only looked to change its business model when investors realized the current model was failing. Groupon pivoted to a highly competitive market and lost. The rest is history.

A simple but obviously lesson.

If a company has to use clever tricks to try and fool investors, you should realize they are desperate and avoid them like the plague.

If the business model does not make sense today and the management team is not skilled enough to expand upon the current model, don’t buy the stock. All of Groupon’s actions signalled that they themselves did not believe the current model was working. Why would you invest in this company?

Farmville either brings back fond memories of simpler times or incites rage for all the spam invites to the game you received.

Zynga learned the latter feeling was common the hard way.

Just like with companies trying to optimize their website to appear higher in Google rankings, Zynga figured out how to milk the Facebook algorithm.

Zynga’s most popular games Words with Friends and Farmville were able to abuse Facebook’s built in network of users for a surprisingly long time. Players were encouraged to send their friends spam invites to the games, in exchange for rewards. This worked for a long time and Zynga was off to the races.

Eventually, Facebook realized the risk Zynga posed. If Facebook wanted to turn the platform into a serious advertising machine, it had to remove all annoying spam from its News Feed and Notifications. Without doing so, Facebook was risking losing valuable users. Luckily, Facebook had the power.

Facebook changed its algorithm and rules which crippled Zynga. Debuting at a modest $10 per share (approximately), Zynga reached highs of almost $15. Once the reality set in that Zynga had built a company that relied on another company to exist, the stock crashed mightily and has not recovered since its 2011 IPO.

Business 101.

Never invest in a company that relies on another company to succeed. Companies’ priorities and allegiances change often. Companies that are friendly today might become enemies by tomorrow. Invest in companies that are or have a real chance at being self sufficient.

Hopefully these lessons will help you on your journey to becoming a successful investor in tech IPOs. Remember, you don’t have to buy right after the company goes public. You can wait a few hours, days, or even years to buy. Purchasing at the right time is the difference between becoming rich and losing it all.

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