A dirty secret of initial public offerings is that even the coolest ones may make only a handful of people rich — and it may not be regular people, employees or even fancy pre-I.P.O. investors who get a windfall.

DoorDash and Airbnb are expected to have spectacular first sales on public stock exchanges this week and start trading at far higher levels than anticipated even a few weeks ago.

But buying stock in relatively young and unproven companies — which usually describes technology companies selling their stock to the public for the first time — is often a coin-toss bet. Even the professional investors who buy stock in hot companies before they go public don’t always get rich, unless they throw their money around early and get lucky. Companies you might have heard of like Uber, Lyft, Snap and Slack were at best meh I.P.O. investments.

Look at Airbnb. Among the investors who got a special chance to buy Airbnb stock nearly four years ago, each $10,000 of stock they bought will be worth about $11,500 if Airbnb starts selling its shares to the public for $60 each. Nice!

But if your aunt had invested $10,000 nearly four years ago in a simple fund that mirrored the ups and downs of the S&P 500 stock index, she would now have $15,600. Even nicer.

The pandemic hurt business for Uber and Lyft, but their stocks were losers before then. Uber’s stock price has bounced back and is now up 30 percent since the spring, and still anyone who bought Uber shares in its 2019 I.P.O. — and even the professional investors who bought its stock in the four years before that — would have made far more money buying an index fund. Uber employees who were hired before the I.P.O. and were paid partly in stock also would have been better off being paid in an index fund.

People who bought stock in Snap, the company behind Snapchat, in its 2017 initial public offering had to wait more than three years to not lose money on their bet. Slack just sold itself at a share price not much higher than its first public stock sale last year.

These are cherry-picked examples. There are companies whose stock prices have soared since their I.P.O.s and made people rich — Zoom Video is a prominent example in technology. And the people who have already bet on the restaurant delivery app DoorDash stand to make a big profit when the company goes public this week.

Will Airbnb be a winning I.P.O.? It depends. It definitely will be for the venture capital firm Sequoia, which bet on Airbnb early. And it’s certainly faring better than people expected when travel froze early this year. But no one can confidently predict whether its share price will shoot to the moon like Zoom’s has since its 2019 I.P.O. or will plunge as Lyft’s did after it went public.

That’s the lesson. Cool companies don’t always make good investments. The people screaming on Robinhood about their splurge on a hot I.P.O. may not know what they’re talking about.

Source: Read Full Article