IPO Hesitations

Sometimes when a new initial public offering (IPO) comes out in the Second Life capital markets, I may read the prospectus and then decide that this company is a worthwhile investment, with a good business plan and solid management. Other times, I have reservations about buying an IPO for various reasons, some of which have become more common and so I thought I would list here. Maybe I'm off-base with my hesitations, or maybe I haven't seen something I should have. Read on, and let me know what you think of my reasons, and maybe add some of your own.

1. Big IPO with a Long Duration

In short, if I think this IPO will take a long time coming to the trading room, I won't buy it. At least not until it's much closer to selling out, and probably not even then. (A good current example of this is the ACE IPO on the Ancapistan Capital Exchange. 7,000,000 shares, with the majority of shares owned by the massive BNT? I think that will take awhile to sell out.)

The reason is because when an IPO takes a long time to sell out, investors who bought in early get nervous. Maybe First Life situations create a demand for cash from Second Life, maybe they find better investments they wish to try, but whatever happens, they suddenly have an urge to trade their shares for cash. This often causes long-standing IPOs who move to the trading room to drop below their IPO price almost instantly. Therefore, the prudent investor looking to maximize returns will wait until that price drops and buy at 90%, 80%, 50% of the IPO price.

2. Existing Businesses Suddenly Becoming Generous

"We've been in Second Life for 3 years and now we want to share the wealth!" Uh-huh. Sure you do. When I read this I think to myself that this is either a business in serious trouble or an outright "poof" scam (the CEO goes "poof" with all the money). Neither is good for my ROI, so I'll stay away from these.

3. Banks

When I see a bank IPO, a huge, flying, shimmering red flag goes up in my mind. Unless there is some major project requiring capital expansion, this screams "I can't pay my interest" to me. That's not my type of investment.

There has been some discussion as to whether or not JTF will IPO on the SLCapEx forums. Should JTF IPO, I will reduce my cash and stock holdings significantly within JTF in anticipation of its failure. The reason is because I don't think JTF needs money to IPO. They're already huge - why would they need another L$1, 5, 10 million to expand when they have somewhere in the neighborhood of L$80 million on deposit, last I heard? That doesn't make sense, and therefore taking JTF public would be a major sign of insecurity to me. Once again, readers, please comment if you have a different analysis.

4. Multiple Companies under one CEO or Brand

While this could be perfectly legitimate, it also runs the risk of "robbing Peter to pay Paul." This is a criticism I have of the LNL brand, as well as the BNT brand and (basically) it's spin-off, ACE. I would have added the Delicious brand to that list, but they recently combined their tickers into the DDE ticker on the WSE.

I would rather see one conglomeration than two or more separate and distinct companies building into the same brand. For one, bookkeeping costs (or time spent bookkeeping) is likely to be significantly less under one ticker symbol than two or more. Secondly, if the businesses are combined, then divisions doing well can help divisions which need more capital infused into them to succeed.

Also, remember that Jasper Tizzy controlled three tickers at the time of his departure, and it has since been discovered that he used the deposits of the bank (one ticker, AVC I believe) to pay for the land purchases of another (CGI). I am not accusing IntLibber or Lindsay of these dishonest actions, but I simply ask investors to be wary of the possibility and to do their homework when dealing with these companies (which they should be doing anyway).

5. Incompetent Management

If you're really hoping to hold on to this security for a few months (long-term in Second Life), then chat/talk with the CEO before purchasing. Ask them questions. Hard questions. Ask them where the money is going, what it is going to be used for, how much they expect to bring in, low estimates, high estimates, share price targets, "what ifs," etc. If they can't at least attempt to handle your questions, or worse yet blow you off, then run away fast. So long as you ask in a respectful manner, they should respond likewise.

Every company I own I've either contacted the CEO or read enough of their blog to know they're competent. One of my biggest hints that Tao Group Bonds (formerly WSE:TGB) was going to fail was that Chao Mu, the former CEO, became rather frustrated with my questions and started giving sarcastic responses. That was a big red flag to me, and I sold before my money got completely "WTFed."

These are my principal reasons why I do not participate in a new IPO on an exchange. Certainly I have missed some opportunities from my caution, but I feel that prudence is the better part of valor, and I know I've also saved myself some Lindens with these rules of thumb. As always, comments are welcome here or in-world.