How do tech companies perform post-IPO?
Most IPOs “pop” on Day 1
Back in December, ServiceTitan IPO'd at $71 and very quickly jumped to $102 per share🎉. That 43% pop is nothing to sneeze at – but it’s also not abnormally great by any means. In fact, VC-backed tech IPOs average a 37% first-day pop, according to research by Dr. Jay Ritter (see below).
The more interesting conversation to be had is about what to do after the initial lockup period (typically around 6 months), when employee shareholders will have a difficult decision to make: should they hold onto their RSU shares or sell?
If you're looking for data on post-IPO returns, I love this chart from Nasdaq that shows IPO returns by decile group.
Here’s the breakdown:
After 3 years, the top 10% of IPOs earn an average market-adjusted return of over 300%. They absolutely crush it. These are the usual suspects (the Googles, NVIDIAs, Microsofts, etc.) that we hear about all the time.
But also after 3 years, 7 of 10 tech companies are underperforming the broader market. If you look back at the top graph from Dr. Jay Ritter, his research shows a strikingly similar pattern: No matter the sector, the average return of an IPO is lagging the market.
And, even worse, the bottom decile of IPOs are nearly completely wiped out. We don’t often hear about these companies.
So should I hold my RSUs or sell them upon vest?
At least from a purely quantitative perspective, the data seems to scream “sell and reinvest!” But alas it’s always more nuanced than that. There is no one right answer -- it's an incredibly personal decision that requires an introspective approach around what matters most to you. Some questions that you may want to ask yourself:
What are my financial priorities?
What is my risk tolerance and risk capacity?
How much concentration risk do I have?
What is the opportunity cost to me and my family?
What are the tax implications?
What will I regret the least?
This last bullet touches on regret minimization, which I think is powerful.
If you’re struggling to distill the answers to these questions, consider hiring a professional for guidance. Ideally, this person will also know your financial situation well enough to help you identify the various risks to your plan (by definition, you are blind to the risks in your plan).
As the IPO market thaws (or, at least is expected to thaw), many other employee shareholders will face the same question: hold or sell the RSUs?
Databricks and Chime employees – my bet is that you're up next!