[yellowstuff]

I don't know about GrubHub in particular, but it is normal to see first day IPO returns of 20% or more. The main reason is monopsony- there are a limited number of institutions that can make significant investments in new IPOs, and they demand a discounted price. Another factor is that there are just a few bulge bracket investment banks to facilitate large IPOs. Their loyalties are more with the repeat players that buy IPOs than the smaller players that sell them.

Note that the founders who sell into an IPO tend to hold onto a lot more stock than they sell, so they're not solely concerned with getting the best price at the IPO. Do you think when FB cratered after the IPO Mark Zuckerberg was smiling because he got a great price for the shares he sold?

Even Google wasn't smart or powerful enough to beat the system. They tried to do an auction instead of a regular IPO, but at the last minute large investors threatened to pull out, so Google IPOed at $85 and popped 17%.

[spacehome]

> Do you think when FB cratered after the IPO Mark Zuckerberg was smiling because he got a great price for the shares he sold?

Yes, as a matter of fact, that's exactly what I think, and I don't blame him a bit or even think that's a bad thing at all.

You're framing it as the alternative being that the stock price is the same on the first day and doesn't crater. The actual alternative is that Mark sells his shares for the depressed price.

[yellowstuff]

FB stock falling was actually a big embarrassment for both the company and the banks that ran the IPO. At best Zuckerberg had mixed feelings about selling at the (temporary) top of the market.

But my point was more that the institutional investors want a low IPO price and have the power to make an IPO fail if they don't get it, the banks running the IPO want a low price to make the investors happy, and the founders selling into an IPO have the least power and also have mixed incentives about the price.

[saileshr]

Would like to understand this better: If you have such a well known brand name like Google or Facebook, why not manage a direct sale to the public via auction and cut out these institutional investors? Even if these institutions threaten to pull out, isnt there enough capital in the markets to absorb a $1B IPO?

[jackgavigan]

Google originally planned to price their IPO using a kind of bastardized hybrid Dutch auction process but their timing was unlucky - the market dropped significantly between the time they announced their IPO to the day they actually floated, with Internet stocks performing worst of all (the NASDAQ Composite dropped 8%; Amazon dropped 15%). They ultimately bowed to pressure from the lead underwriters (I was working for Morgan Stanley at the time, so I remember it well) and agreed to reduce the price to a point that would guarantee a first-day pop[1]. It's generally accepted that it was underpriced[2].

Facebook actually did okay. The underwriters had to step in to support the stock price after the IPO, which actually implies that it was over-priced. Somewhat embarrassing for the underwriters but great for Facebook!

There were a spate of companies that did actually use the Dutch auction process around the Dot-com boom (e.g. Overstock) but it wasn't popular with institutional investors[3].

If you're interested in the topic, I'd recommend Information Markets by William J. Wilhelm Jr. and Joseph D. Dowling (Harvard Business School Press, 2001).

1: http://news.cnet.com/Google-slashes-IPO-price/2100-1024_3-53...

2: http://www.bloomberg.com/apps/news?pid=newsarchive&sid=ayLEX...

3: http://www.wsj.com/articles/SB1028063270104806040

[unreal37]

I would suggest that any time you try to cut out significant profit out of an established system, you've got the whole system working against you.

Sure, it can be done. But everything will be more difficult. And you'll have to do a lot more of that work yourself. And potentially mess it up. And potentially be sued when things go bad. The $ savings just turn into $ risk.

[prostoalex]

There's the overhead cost of working with the various brokerages, and then the marketing cost. Even when Google was a household name, the news of their IPO apparently did not reach enough interested investors to make it interesting.

http://www.washingtonpost.com/wp-dyn/articles/A10478-2004Aug...

[yellowstuff]

Google tried exactly that, letting people bid for as few as 5 shares. It didn't work.

A company like GrubHub, with much less name recognition than Google, is much more reliant on a bank helping to market their IPO, and in a worse position to try an auction.