What Ancient Rome Can Teach You About Investing in IPOs
A 400-year history of public offerings, and the questions worth asking.
Why Everyone Is Suddenly Talking About IPOs
After several quiet years, IPOs are rearing their heads. With the rise of private credit, some of the world’s largest companies have furloughed going public for the last decade. But now, it seems that many have plans to IPO within the year and the prospect of finally owning a piece of these companies is close to becoming a reality.
The question many people are asking today, “Should I buy the IPO?” is difficult to answer. The better starting question for us is, “What is an IPO?” That answer turns out to be a longer and stranger story than most of us realize.
The Forum, Spice Ships, and The Prospectus
An IPO, or Initial Public Offering, is the moment a private company opens its doors and invites the public to become part-owners. Until that day, ownership is concentrated among founders, employees, and early investors. After it, anyone with a brokerage account can buy a share.
The mechanics sound simple. The idea behind them is not. Letting strangers own a slice of a company they do not run, and trusting that the company is: 1- telling the truth and 2- able to make money, is one of history’s more peculiar inventions. As such, it took a long time to get right.
The story begins, as so many others do, in Rome. The Romans had a structure called the societas publicanorum, which were joint ventures that pooled capital from many investors to fund big state projects: aqueducts, road construction, supplying the legions on campaign, etc. Investors held shares called partes, and those shares traded informally in the Forum. For example, a merchant in Pompeii could own a fractional interest in a public works project he would never see. It was, in embryonic form, a stock market.
The real breakthrough, however, came in 1602, in Amsterdam. The Dutch East India Company needed to finance spice voyages to Asia. These were intense multi-year expeditions with crews of hundreds and capital requirements that exceeded what any single merchant could provide. Ships left for two years at a time, sometimes longer, and many of them never returned. With such high costs and high risks, individual investors would often face ruin if one of these voyages were to fail.
In response, the Dutch did something nobody had done before: they sold shares to the general public.
This enabled the risk and profit of these massive investments to spread out amongst thousands. To make those shares tradeable, they created the Amsterdam Stock Exchange, the world's first.
That, in essence, is the prototype for every IPO since. The modern stock market is, more or less, a Dutch invention to fund spice ships.
For the next three centuries the model spread to London, Paris, and eventually New York, but it grew up without guardrails. There were no real disclosure requirements. Companies could say almost anything to sell shares, and many did. By the 1920s, U.S. markets were full of pump-and-dump schemes, insider self-dealing, and prospectuses that were closer to fiction than fact. Then 1929 hit, the market collapsed, and the country was forced to confront the fact that the system was broken.
The response was the Securities Act of 1933, followed shortly by the creation of the Securities and Exchange Commission. Together, they rewrote the rules. Any company wishing to sell shares to the public was now required to register, disclose its financials, publish a prospectus, and tell investors (in detail, under penalty of law) what could go wrong.
This is why a modern S-1 filing reads like a small phone book. That document exists because a hundred years ago, ordinary people lost everything in the dark.
Every IPO today sits on top of four hundred years of figuring out how to let strangers safely invest in something they do not run.
The Facebook Story
With all of that scaffolding in place (e.g. disclosures, regulation, accredited underwriters) one might assume IPOs have become orderly, regimented affairs in our modern age. They are not.
May 2012. Facebook was the most anticipated IPO in a generation. It boasted nine hundred million users and a founder on every magazine and morning show in the country.
The offering was priced at $38 a share and the company was valued at over $100 billion, creating the largest tech IPO to that point. The opening bell rang, and within minutes the trading systems at NASDAQ buckled under the volume. Orders were delayed for hours. Some investors did not know until the end of the day whether their trades had executed.
Then the stock began to fall. Over the next three months it dropped from $38 to $17, cut in half. Lawsuits followed. Opinion pieces declared Facebook a failure. The consensus narrative became that the company would never figure out mobile, that the entire social media boom was over, and that the IPO had been wildly overpriced. An investor who had bought at $38 and looked at their account that summer would have felt sick.
And then Facebook figured out mobile.
Over the next two years the company rebuilt itself around the smartphone. By August 2013 the stock crossed $38 again. By 2015 it was at $100. Today, that same company, now Meta, trades at many multiples of where it went public. Anyone who bought at the IPO and held has done extraordinarily well. Anyone who bought and sold at $17 locked in one of the worst-timed losses of the decade.
Two lessons sit inside that story, and both apply directly to any IPO worth your attention.
The first is that IPOs are volatile. The day-one price is not a verdict on the company. It is a snapshot of hype meeting reality, and those two things take time to reconcile.
The second is that the story of an IPO is almost never the story of day one. It is the story of the next five or ten years. Time in the market does more work than timing the market, but only for an investor who can actually stay in it.
What You Are Really Buying
This is the question worth asking every investor who says they want to "buy the IPO." What do you think you are buying?
The honest answer surprises most people.
When a company IPOs, the shares offered at the IPO price, the $38 in Facebook's case, are almost entirely allocated to large institutional investors. Mutual funds, pension funds, sovereign wealth funds, the highest-priority clients of the underwriting investment banks. By the time the stock begins trading publicly on the morning of the IPO, those shares are spoken for.
The individual investor, even a wealthy one, is almost always buying on the secondary market. That means buying on day one of public trading, at whatever price the market opens at. For hot IPOs, that opening price is often considerably above the IPO price itself.
A useful analogy is concert tickets. The IPO price is the face value of the ticket. By the time most of us are buying, we are buying from resellers, and the price reflects whatever the crowd is willing to pay that morning. Sometimes that price is fair. Sometimes it’s Taylor Swift and you have to take out a mortgage for nosebleeds. Knowing the difference is most of the discipline.
Four Questions Worth Sitting With
How, then, should a thoughtful investor approach an IPO? At Pursuit, we think four thoughtful questions help frame the decision.
1. Have you read the S-1?
When a company you are considering files its registration statement, read it. At a minimum, read the summary and the risk factors. The headlines will be exciting. The S-1 is where the real information lives.
2. Are you investing in the company, or the stock?
These are different decisions. A company may well be phenomenal. That does not automatically mean its stock at the opening price is a phenomenal investment. Facebook demonstrated that even great companies can have rough early years as public stocks. The question is not whether you admire the business. The question is whether the price reflects the future cash flows the business will generate.
3. Could you hold through a fifty percent drawdown?
Whatever the allocation, ask honestly: if this stock dropped fifty percent in the first six months, exactly as Facebook did, would you hold, or would you sell? Position sizing is not only a matter of portfolio math. It is a matter of what you can sleep through.
4. What is your real entry price?
You will almost certainly not be buying at the IPO price. You will be buying on the secondary market, often at a meaningful premium. The question, therefore, is not “Is this a good IPO?” The question is “Is this a good investment at the price the market opens at on day one?” These are very different questions, and conflating them is the most common mistake we see.
One Last Thought
IPOs are exciting because they feel like a chance to get in early on the future. The public market, however, is by definition not early. Rather, it lives in the future. It is built on prediction. By the time a company goes public, it has already been built, with other people's capital, over years or decades. What an investor is buying is a seat on the next leg of the journey.
That can absolutely be a great seat. The point is simply that one should go in with their eyes open, with a long time horizon, and with a clear sense of how the position fits the rest of their financial life.
That last part is the part most investors get wrong on their own, and it is the part a thoughtful advisor is genuinely useful for. If an upcoming IPO is something you have been considering, we would welcome a conversation about where, if anywhere, it might fit in your broader portfolio.
Sources
“Facebook’s IPO 10 Years Later: New Name, Same CEO and a Familiar Problem.” CNBC, May 18, 2022.
Ferguson, Niall. The Ascent of Money: A Financial History of the World. New York: Penguin Press, 2008.
Malmendier, Ulrike. “Law and Finance ‘at the Origin.’” Journal of Economic Literature 47, no. 4 (2009): 1076–1108.
“SEC Will Probe Nasdaq Glitches; Facebook Closes Slightly Above IPO Open.” Washington Post, May 18, 2012.
Securities Act of 1933, Pub. L. No. 73–22, 48 Stat. 74; Securities Exchange Act of 1934 (establishing the U.S. Securities and Exchange Commission).
Wood, Diana. Medieval Economic Thought. Cambridge: Cambridge University Press, 2002.