An initial public offering or IPO represents a company’s first foray into the world of publicly-traded stock. While an IPO can be highly anticipated by the company, prospective investors, and the market, success isn’t always guaranteed.
In some cases, an IPO flops altogether which can raise questions about the company’s long-term viability. While a failed IPO isn’t a guarantee that a company won’t succeed, it can make establishing a firm footing in the marketplace more challenging.
What Does It Mean When an IPO Fails?
When an IPO flops, it usually means that the stock’s price dips below the initial opening price set on the first day of trading. Trading may pick up again the next day, resulting in a rise in prices or it may continue to flatline or, in a worst-case scenario, hit rock bottom. There are different reasons why this can happen but it is disappointing to company executives as well as investors who were banking on the IPO being a winner.
An IPO failure can also refer to a planned IPO that gets scuttled at the last minute due to problems with the company or a lack of interest from the investor community.
10 Worst Failed IPOs in History
Across IPO history, there are some IPOs that failed more spectacularly than others. Here are some of the companies that proved to be the biggest disappointments.
Robinhood’s Initial Public Offering was deemed one of the worst IPOs ever for a company of its size, with shares falling as much as 10% within minutes of the opening of trading. The company ended its first day of trading at a $29 billion valuation, well short of the $35 billion valuation that had been expected.
Pets.com’s IPO makes the list of worst IPOs in history largely because of how quickly the company’s downfall happened. After raising $82.5 million in its February 2000 IPO, the company filed for bankruptcy a mere nine months later.
Uber’s IPO was deemed a Wall Street flop after the company failed to meet its expected valuation of $120 billion upon its debut. While the ride-sharing company aimed for a $45 per share price at opening, it opened at $42 instead before closing down at $41 per share on the first day of trading.
SmileDirectClub’s first day of trading in September 2019 ended up being one of the worst IPOs in decades. The stock was initially priced at $23 per share, opened at $20.55 per share, and continued to fall throughout the trading day, eventually ending down 27.5%.
Root Inc., an auto insurance startup, looked promising enough when its IPO raised $724.4 million in 2020. Since then, the insuretech stock’s share price is down nearly 90% since its initial offering and the company’s valuation has been cut in half.
6. Casper Sleep Inc.
Casper Sleep’s 2020 IPO got off to a shaky start, with shares trading at $12 to start. The company revised its IPO price down from an initial target range of $17 to $19 per share. The IPO put the company’s valuation at around $470 million, well below the $1.1 billion valuation it had previously garnered through private fundraising.
Etsy ended up being one of the worst IPOs of 2015. After its stock price nearly doubled from $16 to $27 on the first day of trading, the trend began to move in the other direction with prices eventually falling below $10 per share. The stock has since rebounded, but Etsy is notable for being one of the worst-performing IPOs in recent history.
TheGlobe’s IPO flop is one of the worst of the dotcom bubble era and in overall IPO history. The company’s stock jumped an astonishing 600% on the first day of trading, raising $27.9 million in its IPO. But less than two years later, the NYSE delisted the stock after it fell below $1 per share.
Vonage’s IPO was so bad that the company was eventually sued over it and three U.S. investment banks received fines from the Financial Industry Regulatory Authority in connection with the IPO. After falling short of the initial $17 price point, share prices continued to tumble, eventually bottoming out in the peak of the Great Recession at under $0.50 per share.
Biotech company Omeros was one of the worst IPO flops of 2009. The company saw its stock price decline 36% in the worst two weeks of trading alone. Over the years, the company’s share price has see-sawed, most recently dropping below $10 per share in October 2021 and hovering there through the beginning of 2022.
How Many IPOs Fail?
Pinning down the IPO success rate can be difficult, as there’s a distinction between companies that flop at opening and stay down and those that eventually go on to be highly profitable. As such, investing in IPOs entails a certain amount of risk for investors because it’s so different from analyzing a stock that already has a history of being traded.
According to a Nasdaq analysis of companies that have gone public since the 1980s, the IPO success rate is about 20%. This means that 80% of companies that go public end up being unprofitable when they make their debut on a stock exchange.
The study also found that the majority of IPOs produce negative returns over the long-term. Specifically, two-thirds of new companies underperform the market within three years of their IPO date.
Those figures may seem discouraging but that doesn’t prevent companies from pursuing initial public offerings. In fact, 2021 was a record-breaking year for IPOs, with more than 2,000 companies raising $594 billion globally with public offerings. It’s impossible to know how many of those companies will succeed, but there are certain factors that can influence whether an IPO flops or not.
Why Do IPOs Fail?
IPO success — or failure — tends to be measured in terms of how well results align with expectations. There can be a significant departure from IPO valuations and the trading prices of a stock at listing.
Whether price variation is above or below the initial valuation can determine the success of an IPO. IPOs can also be evaluated based on the actual capital raised versus what the company anticipates raising by going public.
As to what causes some IPOs to fail while others succeed, planning or lack of it typically plays a part. Central to the IPO process is researching the market to determine how much interest and enthusiasm there is among investors for the company’s offering. IPO underwriters also research the company itself to determine how well-received the offering is likely to be.
If an IPO fails, it can often be chalked up to one or all of the following:
• The IPO’s valuation is wrong and the stock is priced too high to attract interest among investors
• The company is attempting to go public at the wrong time
• There’s an underlying issue with the company’s fundamentals or governance
In the case of WeWork, there were questions about the initial $47 billion valuation and whether it might be too high. There were also concerns about the company’s leadership, which contributed to the IPO being shelved.
But even companies with a promising IPO can later fail. And conversely, a seemingly failed IPO can turn into a success story later on, as evidenced by Facebook’s initial flop and eventual rise to become a trillion-dollar company in 2021.
IPO investing holds the potential for great rewards, but as the flops listed here show there are also risks involved with the strategy. It’s important to research upcoming IPOs to determine whether they make sense as part of your overall investing strategy.
If you’re looking at upcoming IPOs as a possible addition to your portfolio, it helps to work with a brokerage that understands the challenges of IPO investing. One way to do that is to open an account on the SoFi Invest® investment platform, which allows you to invest in IPOs via your phone before they appear on a public exchange.
What makes an IPO successful?
Successful IPOs are often associated with companies that have strong fundamentals and have managed to create significant interest among investors. These companies have IPO valuations that closely align with investor expectations and they’re entering the market at an optimal time.
What happens when an IPO fails?
If an IPO fails, that doesn’t necessarily signal the end of the company. The company may adjust its business model or expectations in order to find a path toward profitability. In a worst-case scenario, however, the company could end up closing down or filing bankruptcy.
Why does an IPO fail?
There are a number of reasons why an IPO may fail but it often comes down to lack of planning or unrealistic expectations on the part of the company executives or their underwriting team. An overvalued IPO, for example, or a company that has shaky financials, could end up underwhelming investors once trading opens.
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