Agent of Wealth Episode 65 – Should You Invest In the Latest IPO? with John Williams

The government spends billions of dollars each year on goods and services, and by tapping into this vast marketplace, small businesses can secure lucrative deals, gain steady income and heightened visibility. In this episode of The Agent of Wealth Podcast, host Marc Bautis and guest Richard C. Howard dive deep into the world of government contracts.

As a career military acquisitions officer, Howard oversaw $82B+ in DoD contracts, and has advised and trained over 400 companies as a consultant. He’s the CEO of DoD Contract – which guides, trains, and mentors small business owners and sales executives through the government sales process – and the host of DoD Contract Academy Podcast.

In this episode, you will learn:

The benefits of selling to the US government as a small business.
How small businesses can find opportunities to sell their products or services to the government.
How small businesses can stand out in the government procurement process.
How small businesses and startups can utilize the Small Business Innovation Research Program.
And more!

Resources:

Disclosure: The transcript below has been lightly edited for clarity and content. It is not a direct transcription of the full conversation, which can be listened to above.

Welcome back to The Agent of Wealth. This is your host, Marc Bautis. I’m joined by a guest for today’s episode, Richard C. Howard. Richard is a leading authority on US federal government contracts. As a career military acquisitions officer, he oversaw $82B+ in DoD contracts, and has advised and trained over 400 companies as a consultant. Richard is the CEO of DoD Contract, which guides, trains, and mentors small business owners and sales executives through the government sales process.

Richard is the host of the DoD Contract Academy Podcast, and speaks extensively on the nuance of federal contracting strategy. Richard, welcome to the show.

Thanks for having me on, Marc.

I don’t think people even realize that government contracts are out there. Can you start off by explaining this market size, and some of the benefits of selling to the government as a small business?

The Benefits of Selling to The US Government as a Small Business

The US government is the single biggest purchaser of goods and services in the world. When people think about government spending, most immediately think of big defense contractors. But in reality, the government buys just about anything you could think of – from defense and weapon-related spending, to tai chi instruction, to commodities, to food. Think about it like this: Every military base is basically a small town, or city in some cases. All of the infrastructure that goes into that town or city is paid for by the government. And they have a mandate to buy from small businesses.

So whether you’re in – cybersecurity, accounting, legal, you’re selling food, you have a franchise, you have a training business – the government is most likely buying in your area. It is very rare that I find an area where the government isn’t spending money, so the spending is vast.

The government has to buy from small businesses, yet less than half of 1% of US small businesses are actually participating in the government contracting process, despite the high spending levels.

Alright, so there’s a lot of opportunity here. How does a small business find the contracts?

How Small Businesses Can Find Opportunities to Sell to The Government

Because we’re talking about the government, there is a lot of regulation that exists to ensure there’s fairness and that the public can see what the government’s doing. So everything the government spends money on – with the exception of a couple classified contracting avenues – is public knowledge.

So, as a small business owner, you should ask, “Does the government buy what I sell?” To find your answer, go to a website like usaspending.gov and begin searching public records to find out what the government spends on.

Whatever you sell, it probably falls under something called a North American Industry Classification Code, or NAICS code. When you go into usaspending.gov, type in what you sell under NAICS – for example, accounting. The website will suggest different codes that you would fall under. You can click on that, and sort it by small business spending.

You can quickly see how much the government spends on small business contracts in your industry and area of focus.

Are these contracts location specific? Does it help if a business is located near a military base, for example, or does it not matter?

It depends on what you’re selling. By the way, government contracts certainly extend past the Department of Defense and military bases. There’s lots of different federal agencies that spend money.

Okay so once a business owner discovers how much the government is spending in their niche, what’s the next step?

Once you know that the government buys what you sell – if it’s local, they buy it in your state, or if not, you can work anywhere – the next step is to register your company. You can do that at sam.gov. That’s where all registering and most of the solicitations take place.

So when you go to sam.gov, you’ll find instructions on the screen for registering. Of course, you need to have a legal business in the United States, and come ready to register with your EIN number.

All in all, the process takes a couple weeks sometimes, but at the end of it you’ll get what they call a CAGE code and UEI number – these are federal identification numbers for your business. Once you have those, you can start bidding on contracts.

By bidding, do you mean writing proposals?

Yes.

How Small Businesses Can Stand Out in the Government Procurement Process

What can a small business do to separate themselves from the others trying to do the same thing?

Good question. This is really where most companies fail in selling to the government…

Once your business is registered through sam.gov, you will begin to see what’s called a request for proposal, or RFP. At that point, a business can begin writing a proposal. But, the government is very regulated in how they buy products and services.

For instance, if I saw an RFP come out that the government is looking to buy a $3 million landscaping contract for base X, I can’t just pick up the phone and talk to someone to get my questions about the contract answered. Now, if it’s a big contract, the government will answer most questions publicly through sam.gov. In those cases, you might get some answers that can inform your proposal.

But otherwise, you won’t be able to set up a meeting with a government worker. You won’t be able to develop a relationship…

So, before the RFP comes out, there’s something called the market research phase. Let’s say you’re a software developer, and the government is putting a command and control platform together, and you have a great user interface for that. Well, it’s during the market research phase that you can engage with the government if you really want to have a shot at landing the contract later on. Meaning, before the RFP comes out, we want to know who is doing the purchase, and we want to know the details of the opportunity ahead of time.

If you want to differentiate yourself from the rest of the herd, you want to look for things like a request for information or sources sought. When those come out, they’re squarely in the market research phase. At that point, you can set up a meeting with the government.

I recommend small businesses to respond to requests for information. They’ll answer questions like:

How long have you been in business?
Do you have past performance?
What do you think of the approach the government wants to take?

And, you’ll be able to suggest things. For instance, when you register your business, there are different certifications. Examples include:

Small business certification
Woman-owned small business certification
Disabled Veteran-owned small business certification

If you happen to have one of those certifications, you do have a leg up, because the government needs to set aside a specific percentage of contracts to those certified businesses.

But, back to the market research phase, you can actually recommend that the government lists the contract for a specific certified group. So, you’re helping the government write the solicitation, and you can give yourself a leg-up if you suggest a certification you have.

Okay, so you’re trying to influence the decision a little bit. Have you ever seen a case where a small business had a product or service that the government isn’t spending on, but they propose it to them?

Yeah, there are a couple of ways to do that. I would say if you take away one tip on selling to the government, it’s to get meetings and build relationships with the people that actually buy what you sell. There’s a lot of ways to do that, but mainly through research.

If your business sells a product or service that the government is not actively looking for, but you want to sell to the government, the government needs two things: A requirement, and funding.

The Small Business Innovation Research Program

If it’s an innovative solution of some kind, for example a patent, you can go after something called the Small Business Innovative Research Program, or SBIR. Any government agency that spends a certain amount of money in research and development has got to contribute to this program. So, the SBIR program spends about $4 billion a year on innovative research and development contracts with small businesses.

This is a way to basically propose your product or service to the government, because they have funding in the SBIR program. If the review panel thinks that what you have is innovative, and that it would achieve a government need, you can win one of those contracts.

Phase one of SBIR is kind of low dollar. Let’s say, for example, you’re creating a VR training system. In that case, phase one might just be a feasibility study. You might propose that the government uses a VR or augmented reality training system to help maintain or fix aircrafts, for instance. Well, that might resonate with the board. That first phase one event is probably going to be somewhere around $100,000-$150,000, which is small for government contracts.

But, what you’re really doing is:

You’re establishing past performance with the government, because now you have a contract.
They’re now going to help you find people in the government that would potentially sponsor you.

Now you can’t totally rely on the government SBIR office, you also need to put yourself out there to find a sponsor. If you find somebody willing to sponsor, but they don’t necessarily have to have money, they just sign a memorandum of understanding for you to go to phase two.

Phase two is to develop a prototype, or set up a demonstration. There could be a lot of different things that you’re recommending, but that’s the phase two piece.

The Small Business Innovative Research Program is really great for getting your feet wet. Even if you have a developed product but you’re modifying it for government use, that would also qualify for the program.

Going back to finding these opportunities, my father actually had a government contract through a larger corporation. He created a pellet that went into 50 caliber ammunition. He wouldn’t get the government contract himself, but General Dynamics or Olin would go through him to create this component of their contracts with the government. Are there opportunities like that out there?

Yes. That’s a really good point. There is a variety of ways the government can buy things from a small or large business owner. For example:

Contracts.
Subcontracting.
Sole source contracts.

As a business owner, you need to understand how the government is buying what you’re selling. That’s something that you can do pretty easily with the research tools the government offers.

Let’s say you own a company that is licensed to do HVAC. Over time, you’ve built a relationship with the government office that purchases contracts in construction. From that relationship, you learn that next year, Hanscom Air Force Base is going to be building an office building, and you have interest in installing the HVAC system. But, you aren’t able to take the full construction contract.

What I recommend you do is look through a website like usaspending.gov to see which construction companies have done that type of work with the government – illustrating past performance – and reach out to them about this upcoming opportunity. The fact that you’re bringing them this opportunity sweetened the pot for them to work with you, involving you in the project.

If you reach out to three companies like that, you’ll get at least one or two bites to form an agreement and go after a large contract together. That’s very helpful for a small business, because the big company can handle the proposal writing, and so on.

Artificial intelligence is all the rage right now. Do you see AI being used to uncover some of these opportunities, or to help small businesses in this process?

It’s interesting that you bring that up. Two of my recent episodes on the DoD Contract Academy Podcast were about AI in the government space.

One of them is called Govly, which uses artificial intelligence and machine learning to enable government contractors, OEMs, and distributors to accurately plan for government purchases years in advance

The other is called Rogue, which is an AI tool specifically designed to help businesses write proposals for government contracts. It kind of works like ChatGPT.

Business Financing and Government Contracts

What happens if a business needs financing to fulfill an order from the government?

First, it depends on the contract. If it’s a SBIR contract, where the business is developing something for the first time, then you can win the contract before you have to start development. But those are research and development contracts.

So let’s say you win a small services contract that involves employing 20 people. The small business will have to pay those individual employees before the government pays the small business. That’s because there’s about a 90 day turnaround time on invoicing to the government.

Now, there are certain financing houses set up specifically for government contractors. One thing to know is once you win that government contract, it’s one of the most secure contracts you’re going to have. So a lot of banks know they can count on the government paying the business.

That’s also one of the reasons companies go after government contracts – because it increases the value of your company.

Are Government Contracts Recession-Proof?

In addition to AI, the other thing that we’re constantly hearing about is this looming recession. At a high level, how is government spending compared to other industries?

Government spending is more stable. I always recommend that business owners – small or large – have one stream of income from commercial sales and another stream of income from government sector sales. The government is spending year over year, whether there’s a recession or not.

But I would say that the government experiences difficulties in different ways, and typically at different times.

Usually, if you have a three-year government contract, for example, you’ll receive that funding month over month. Now, there are times when the government shuts down, or when there is sequestration. The government can terminate a contract for convenience. But if they do, there are regulations to protect the companies that held the government contract.

That’s good. Well, we’re just about out of time. Richard, thank you for joining me today. You did a great job explaining how businesses can leverage government contracts as well as how to navigate the government procurement process. What’s the best way for our listeners to contact you or learn more about your advisory coaching services?

Your listeners can go to dodcontract.com to schedule a consultation. On the website, we also have courses available. And of course your listeners can check out my podcast, DoD Contract Academy, on whatever platform they like to listen on.

Great, we’ll link to those resources in the show notes. Thanks again, Richard. And thank you to everyone who tuned into today’s episode. Don’t forget to follow The Agent of Wealth on the platform you listen from and leave us a review on the show.

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Airbnb, DoorDash and Snowflake made the top ten list of 2020’s biggest IPOs. It was a record-breaking year for companies going public, even with the uncertainty brought on by the COVID-19 pandemic, and those who invested in the right place at the right time. In this episode of The Agent of Wealth Podcast, Marc Bautis invites John Williams, Wealth Advisor at Bautis Financial, on the show to discuss if initial public offerings (IPOs) are good investments.

In this episode, you will learn:

What is an initial public offering (IPO)?
How to invest in an IPO.
The pros and cons of investing in IPOs.
Advice for what to do when your company IPOs.
Indicators of a successful and unsuccessful IPO.
How to determine the valuation of a company, including a discussion about accuracy.
And more!

Resources:

Bautis Financial: (862) 205-5000

Last year will definitely be known as the year of the COVID-19 virus, but in the stock market, we saw a resurgence of IPO chatter. Even starting in 2021 — after a little bit of low towards the end of the year — we’re seeing the hype again. I thought it would be an interesting topic to discuss.

Yeah, for sure. There was a record month in December and it’s continuing into January. We, on the practice side, have been getting a lot of calls and questions about them. I think it’s about time we start to work on explaining them, because there is a lot of confusion around what exactly an IPO is.

Beginning in the days that Facebook was an IPO, we’ve been asked if they are a good investment. But this past year, we’ve also had a lot of clients experience their companies IPO. And they want to know how to best manage that.

Before we get into it, I want to say that while John and I are financial advisors, we may not be your financial advisor. Before you make any investment decisions, please consult with a financial professional.

Towards the end of last year, two of the bigger IPOs were Airbnb and DoorDash. And we’re seeing a strong IPO season as this year starts. Before we start talking specifics about investing in them, can you give us the basics: What is an IPO? What are the mechanics of a company that is IPOing?

How A Company’s Success Kicks Off Its Initial Public Offering

There’s really two parts to this. But in general, an IPO is an exciting time for a company, right? It means a couple of different things, but mainly that the company is successful. They’re at this point where they’ve been working really, really hard and they now get to reap the benefits. The company is typically in a great spot, because it’s usually an indicator that the company has been profitable.

There is this word, what they call ‘unicorn status,’ which is when a company is at that billion dollar valuation. That being one of the times, and one of the signs, that a company is ready to take on the SEC regulations that are required to go IPO. And so when we hear about these IPOs, they’re usually companies that have made some noise. They are these disruptors — like Uber. I think that’s the start of this conversation: the success of the company.

You mentioned success a couple of times. Let’s go one more level down. At the start, there is a private company with a founder. It may have some owners, as well as some executive officers. At this level, everyone in the company gets “stock,” but because it’s a private company there’s really nothing you can do with it.

Now, the IPO is the event that allows those with stock to profit. They’re able to have the option of making money and getting “paid out.”

According to Investopedia, an initial public offering (IPO) “refers to the process of offering shares of a private corporation to the public in a new stock issuance. Public share issuance allows a company to raise capital from public investors. The transition from a private to a public company can be an important time for private investors to fully realize gains from their investment…”

You mentioned profitable — which we will talk about in a little bit — because there are a lot of these companies that have IPO but are not profitable. But yes, like you said, it’s an exciting event for a company.

That’s why I treaded lightly around the talk of ‘unicorn status’: that one billion valuation. Because there’s been plenty of IPOs with companies, the ones we know very well today, that were not profitable. It was just the space that they’re in, and the momentum they had.

But in general, there’s two phases that lead to issuing a IPO:

The pre-marketing phase.
The implementation phase.

The pre-marketing phase is when the corporation will start to advertise their interest in going public, which involves reaching out and advertising the underwriters. Ultimately the underwriter (or underwriters) will help them get the word out and figure out the valuation of the company. As you can imagine, this is going to take some time.

The implementation phase includes forming a board of directors, implementing a process for audit and estimating the demand. There is a supply and demand portion of this, which we can get into a little bit more. But this phase includes understanding the demand.

Since these companies are private at this point, there is not a lot of public information available. Especially compared to publicly traded companies, who you can dig into to understand profitability before investing.

Finally, this leads to issuing the shares of the IPO, picking a date and coming up with the starting price per share.

Okay. That’s a good explanation of the mechanics, and we’ll hit upon a couple of points.

The first thing you were talking about was underwriting. Previously, or most of the time, this used to be the job of large, Wall Street banks — like Goldman Sachs or Morgan Stanley. Now, what we’re seeing a bit more is funds coming from SPACs (special-purpose acquisition company). They are coming in and helping companies go public.

The other point that you mentioned is that once a company goes public, there is a lot more transparency. Plus, they will acquire shareholders who will hold the company accountable for success, based off of quarterly results.

The hunger for good quarterly results is being pushed a lot. I think Facebook is the perfect example. When Mark Zuckerberg was running the company, and the company went public, the stock dropped. He was confused, wondering, ‘Well, what happened?’ Previously, he was focused on creativity — making a cool platform. But after going public, he learned very quickly that the bottom line does matter. User growth, acquisition and other key performance indicators mattered. Going public does change how a company operates.

I can imagine how hard it is to be in that position. Especially a guy like Zuck, he had all the control, he made decisions. For that to change overnight, I’m sure is a tough adjustment — especially for those who are not necessarily answering to anybody. After the company IPOs, they have a board of directors and profit runs the game. I can imagine it’s a tough adjustment from a lot of different angles.

So, Is an IPO a Good Investment?

Now comes the golden question: A new company is IPOing tomorrow, or next week, should you buy some?

One thing that is warranted is to look at IPOs performance: whether it’s right after they IPO or long-term. Unfortunately, there is not one answer that can be used across the board.

Like with anything, it comes down to the risk and return. We make sure that people understand that. Then, we help them make the decision, based off of their comfortability with the risk.

What Does an IPO’s First Day of Trading Tell Investors?

The dynamic of the first day is complicated. I think it’s important to understand what happens.

To give an example, let’s say that the underwriter decided the IPO is worth $20 a share. Most times, you will see a big jump up in price initially. Because what’s happening is, there are limited orders that people will put in, so there are only so many shares.

If you’re lucky enough to get in at that initial 10, 20, 30 minutes to an hour — when a lot of that action is happening — it’s really, really hard to get in at that $20 point. A lot of times you will end up buying at the peak of the initial jump — which isn’t necessarily bad per se — but it’s just that first jump. I don’t think a lot of people realize there is a lot of action on the first day.

And even sometimes you’ll hear that the IPO is going to be priced at $20, but it opens way above that — it doesn’t even trade it at 20.

A comparison is the New Jersey real estate market. Over here, you will frequently see realtors underpricing houses for sale, which created a feeding frenzy of buyers. The thought process is that underpricing is a better strategy than overpricing, which could lead to less demand. When IPO underwriters underprice, there’s an enormous amount of demand — and, from the start, it increases the share price. That’s one strategy that we see a lot.

And let’s back it up a bit. Before a company IPOs, CEOs, managers and employees may have an option to buy stock earlier on — and sometimes there are perks like partially vested programs. Companies can also offer friends and family opportunities to buy the stock. If you’re in these kinds of situations, then it’s a totally different conversation.

But if you’re a consumer, like you said, it might come out at $20, yet most people will be initially buying it at $40, $45. It can be difficult to determine if that jump is based off of hype or real fundamentals.

How to Determine the Valuation of a Company

You want to determine what the company’s valuation is. Knowing the stock price is one part of the equation, but you also have to understand how many shares the company has outstanding. With those two numbers you can determine the market cap of a company.. It’s one thing to say a company’s stock price is $43/share, but to know that the company is valued at $60 billion is a lot more telling on whether they are undervalued, overvalued, or accurately priced.

For example, there was a popular company that went IPO last year called Snowflake. There was a lot of hype around the IPO, just like there was with Airbnb and DoorDash.

Last year — pretty soon after they went live — DoorDash was valued at $56 billion (more than General Motors, for example). It had undoubtedly earned ‘unicorn status,’ but there was a lot of chatter that followed. People began to wonder if DoorDash had a viable business model, with potential for profitability of the investment. Similarly, a couple weeks after Airbnb went live, they were valued at $83 billion (more than FedEx at the time).

Everyone knew that Airbnb had a lot of potential to disrupt the hotel and travel market, but what people may not have known is that these positive projections were already priced into the company at the time it IPOs.

For someone wondering if they should invest, you must ask yourself, ‘does this company have more positive projections that we can expect?’.

Snowflake was worth over $100 billion, which was more than Goldman Sachs at the time. Some of those IPOs came back to earth a little bit last year, which I think is something that we see a lot.

After the initial spike, there is frequently some pullback as hype wears off. Can you talk about this dynamic?

Yeah. Whenever there’s hype involved, I always advise people to be cautious. It is difficult to determine how much of the price is built on hype, and how much of it is built on sound fundamental analysis.

I get the idea that sometimes you have to throw fundamental analysis to the wind: there’s a lot of bloated stocks out there, such as Tesla. When you do a fundamental analysis on Tesla it doesn’t make sense, but there are some things that can be built into a long-term expectation that somebody is doing.

That initial excitement is a dangerous spot to be in. In reality, the chatter could stem from someone offering advice with zero analysis to back it up. You have to be careful of the hype in the media.

Conversely, you can be on the right side of the hype and it works out. But our job is to make sure that the risk is known.

Just point out that some of these companies, yeah, they do ride up and they ride up even more and you look at the valuation and you’re thinking, ‘this is crazy.’ And then, it still goes up even more! But we also see the reverse happen too: where you’ll see a pop — almost a tease — and then it drops.

With Facebook, it turned out the best outcome came for long-term investments. If, as an investor, you could have handled the initial drop (where the stock price was halved). Looking back at that drop now, as an investor that stayed in, that 50% drop didn’t matter. But you had to be willing to stick with the company through it. Which, I think, is the attitude you need to have with IPOs. You need to like the company, believe in the company and hope it grows into the valuation.

To over simplify it: even believing that the company is doing well now, but thinking they can do better down the road, right? something as simple as just the company is doing well now, I think they can do a lot better down the road.

At the end of the day, we’re talking about profitability. The company — even if they’re not there today — have to get to that point. There is a reason why a company is going to have value and a lot of it is tied into revenue and profitability.

Again, Airbnb is a perfect example. I can see they’re the massive disruptor, right? But they’ve saturated the market. Right? How much more can they grow? How much more market share is there to have in that space? Just thinking about it, I would caution people to have a basis for why they’re buying it, other than just the hype.

Airbnb is one of the more unique ones: it was a riches to rags to riches story. The company held out on IPOing, and then the COVID-19 pandemic hit. During the pandemic, many thought it was the end of traveling. Consenquentaily, Airbnb would be a company that wouldn’t make it. But, in reality, Airbnb saw success because the COVID-19 pandemic led to near-term traveling, making U.S. Airbnbs perfect destinations. The success allowed Airbnb to reinstate their IPO, and it worked out.

Another route we’re seeing as of recently is companies holding back on IPOing, which there are a couple of different reasons for doing.

Staying Private: Advantages for the Company, Disadvantages for the Investors

Last year we saw it because the IPO market was so hot that the companies didn’t want to leave money on the table. So they held off in hopes of allowing their valuation to grow even more. That’s actually been a theme over the past couple of years, and that also falls on the negative side of investing in these.

What’s happening is a lot of the early investors (when public) are venture capitals and funds, who then get gains as the company is increasing revenues by 100% or 200%, and they’re almost sucking out all the gain. And then they’re IPOing, and they’re having the regular investors get stock. But at this point, a lot of the potential future gains have already been taken.

You sometimes forget the reason, but there is the raising money part of this too. Sometimes, the CEO of the company’s original shares may have been zero, and now they’re worth millions and millions. You can see why there is that part of it.

I was just talking to someone about Stripe. Back in October of 2020, they at an valuation of a little over $30 billion. They’re in this fintech payment space, a space that has exploded over the past couple of months. They just raised more money a couple of weeks ago, at a $96 billion valuation. But, they were supposed to go public last year. Instead, they pulled their IPO because the market was nuts.

Companies’ valuations are increasing, which leads them to think ‘if we IPO now, we might leave a lot on the table, so let’s wait until next year.’ While this can work out perfectly for the owners, it may not necessarily work out for the investors, because their valuation has almost tripled in that four- to five-month period.

Another thing that investors should look at is the history of the company and the price that it’s IPOing at. Does everything have to go perfect for this thing to keep going up? It’s a fine line a lot of times how successful these IPO’s are.

What you’ll notice with Shark Tank is that a lot of people come onto the show with their valuation, but there’s not always agreement as to whether or not it is correct. I think what’s really going on with Stripe is yes, they raised the money at that valuation, but it may not be correct.

Cash Flows and Valuation

There’s a lot of ways you can value a company. But one I use a lot is projection of future cash flows. It is a simple way to determine, for instance, or the next 20 years, how much the company will make. At a certain level, it is that simple.

That’s definitely the traditional way of valuing a company: looking at its cash flows, earnings and revenue growth. But, some of that relevance has changed recently. The comeback that you’ll get from some people is that you don’t have to look at cash flow at all, because a company is worth whatever someone will pay for it. What people are doing nowadays is buying on future projections. It’s a similar concept to a house, right? What’s a house worth? It’s whatever someone will pay for it.

Investors believe that if a stock goes up, it will go up again: so they buy it. Obviously we know that that doesn’t always happen, but to say that it’s just cash flows isn’t completely accurate. The dynamics of investing are different now.

Earlier we were talking about the effects of bad quarterly results. An example of this would be Netflix: their stock price hinges on how many subscribers they get. The market doesn’t care too much about their earnings or revenue, they focus solely on new subscribers. For other companies it’s different.

Some people look at stock prices and buy in as prices are going up, with the intention to sell as it’s going down. That simplicity has worked to an extent, but markets are dynamic and that strategy may work today, or it may have worked last year, but at some point it may not work anymore. And you could see some pretty substantial losses by taking that approach.

I think that the biggest takeaway from that is the lack of control you have over understanding that part of the price of the stock. Right? The hype. I get that it’s not as simple as just cash flows.

There’s also the other part of this that we haven’t touched on, which is the technical analysis. There’s the risk of the market falling which would affect everything.

Maybe I’m a little old school, but I believe the reason why we should buy stock in companies is because of their performance and value.

Investing Vs Speculating

Well, there’s definitely a difference between investing and speculating. If you’re investing for a purpose, you have something you’re looking to do, some goal, something in the future. Investments help you get there. Versus speculating. There is a difference between the two.

I said earlier, it’s not that we poo-poo investing in this or investing in that, it’s more about knowing what you’re getting into — upside and the downside — and making sure that:

You’re comfortable with the potential on the downside.
It’s not going to ruin your finances, whether it’s retiring by age 65 or having enough money to put your kids through college.

If you have some play money and want to invest in an IPO, go for it! But you want to make sure that it’s not going to wreck any part of your financial plan.

How to Invest in an IPO

That’s a good segue into how someone can invest in an IPO. Obviously the easy route is using your account (TD Ameritrade, Robinhood, E*TRADE, Schwab, etc.) and purchasing it, just like you’re purchasing any other stock.

But some people like to, or want to, get in before. For that, you can use websites like OurCrowd or EquityZen.

There’s also a third option. Certain companies are looking for money, right? And they may have gone the venture capital route and raised money from a venture capital firm. But they can also pitch their company to regular investors, like you see in Shark Tank. There are some prerequisites to the investor, like whether or not they’re qualified or accredited — which is based on income and net worth. That’s another option, buying pre-IPO companies.

Earlier, you mentioned SPACs. In a SPAC, you’re basically a passive investor that funds a company who then evaluates a number of different, private companies. After evaluating, the SPAC decided to divvy up their funds among a number of those companies, with the hope that the companies either get acquired — which is a payout — or that that company goes public — which is, again, a payout.

There’s pros and cons to all these strategies, and there are more out there, there are more options out there. But remember, you have to weigh the pros and cons, and again, risk and return.

There’s something about not just investing in IPOs, but investing in stocks and securities in general, that I think is misunderstood. Anytime someone buys into an IPO or stock, there is someone on the other side that is selling. It doesn’t mean that one of you is wrong, one of you is right, but it’s just something to think about.

When it comes to risk, there’s a lot to think about. I worry about the people who have only been investing inside of this bull market because they don’t know what it is like to have lost, literally. I don’t want to be a Debbie Downer, but we are riding high now. So, if you are going to get involved, have it be part of a bigger plan.

All right, we’re just about out of time. Thanks for joining us, John. If anyone has questions about IPOs or investing in general, we’d be happy to talk: schedule a free consultation with us anytime.