In one of the year’s most spectacular market openings, Figma shares surged 250% above their initial public offering (IPO) price on Thursday. However, by underpricing its shares, the software company lost an estimated $3 billion even as it enjoyed the rally. By setting the IPO price at $33 per share, Figma and its selling shareholders were able to raise $1.2 billion. They could have raised billions more if they had priced the offering nearer the stock’s closing value on the first day.
Figma stock soars in IPO, but left $3 billion on the table
IPO pricing is frequently referred to by bankers as more art than science. Businesses want the symbolic triumph of a successful first-day pop in addition to raising as much money as they can. According to bankers who are familiar with IPO strategy, the sweet spot for opening-day gains typically lies between 20% and 30%. Anything higher could be an indication of subpar pricing. According to Dealogic, Figma’s 250% spike far exceeded both that range and the 13% average first-day increase for IPOs this year.
The astronomically high debut was probably caused by a number of factors. A scarcity effect was created by Figma and its investors offering a tiny float, only 7% of the business. By selling 10% to 15% of the business, most initial public offerings (IPOs) increase supply to meet demand.
According to those familiar with the offering, executives also gave top priority to assigning shares to big institutional investors, many of whom demanded that they pay within the desired price range. Even though demand subtly increased, this kept the IPO price fixed and stopped a last-minute upward revision.
Retailers flooded in. Steve Sosnick, chief strategist at Interactive Brokers, stated that Figma was one of the top five most traded stocks on the platform on Thursday. According to Sosnick, there may be blind spots in the pricing process because bankers typically consult institutional investors. “I think they underestimated the demand for this security,” he said. “Once it gets moving, people start to jump on the moving train.”
History repeats itself
This is not the first time billions have been left behind after a tech IPO. Price discrepancies were common during the dot-com era due to speculative zeal and an influx of new online investors. Shares of Priceline.com jumped more than 300% when it went public in 1999. Due to a similar pricing miscalculation, Snowflake’s 2020 IPO left $3.75 billion on the table, and Circle Internet Group’s June debut left $1.8 billion.
Even so, Figma’s early investors made money despite the discrepancy between IPO pricing and market demand. Dylan Field, a co-founder, made $77.6 million by selling 2.35 million shares. At the closing price on Thursday, he kept a stake of about $6 billion.
Through the IPO, the nonprofit Marin Community Foundation made about $440 million by selling its whole stake. Those shares would now be worth roughly $1.5 billion if it had hung on. While some of the leading venture capital firms also cashed out some of their positions, the majority retained the majority of their holdings in anticipation of later sales at higher market prices. The IPO pricing practices and whether today’s investment banks are appropriately accounting for both institutional hesitancy and retail enthusiasm in a volatile and fast-moving market are topics of renewed discussion following Figma’s spectacular debut.
Featured Image Credit: Josh Sorenson; Pexels: Thank You!
