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Are these 'Secret' IPOs too Risky of a Bet?

Written By Brian Hicks

Posted February 14, 2014

Roulette Wheel

A ton of start-up companies have been secretly filing IPOs lately, most notably from the tech industry. This week, it was Opower Inc. – a big data energy company that works with utility companies to reduce energy bills for homeowners.

Choosing to file confidentially, these companies, with their initial public offerings, can quietly feel out the public’s perception before deciding: do we, or don’t we want to go public?

This tactic was first initiated on April 5, 2012 under the Jumpstart Our Business Startups (JOBS) signed by President Barack Obama. It was supposed to give smaller companies a leg up or a head start on the competition and level the playing field.

But even bigger companies like action sports camera maker GoPro (filed last week), and the wildly popular social network Twitter (NYSE: TWTR), have been able to get in on the act.

If that’s so, it has to make you wonder: does it offer any kind of real benefit for smaller startups, and if so, how can we take advantage of it?

When a company does decide to file for an IPO with the Securities and Exchange Commission (SEC), a significant amount of company information is withheld from the public until just before shares are actually offered up. Under law, companies with less than $1 billion in revenue can do this in complete secrecy, including any correspondence with the SEC. This is how companies like Twitter, who entered just under the cap, were able to take advantage of the JOBS Act.

It is not until 21 days before a company sets off on its “road show” for prospective investors, that offerings of documents be presented to the public, essentially giving about a month for investors to review a company’s books.

In this time, a company can evaluate and seek out access to capital without the burden of unwarranted regulations that might impede its progress.

The Latest

This week it was Opower. Last week it was GoPro. Before that it was Box, who I delved into a bit for you guys recently. There was Virtu Financial and (NYSE: CRCM), and Chegg (NYSE: CHGG), who just went public this fall – they’ve all done the same thing.

These companies choose to fly in under the radar because they don’t see any real downside to it themselves. But as investors we barely know who these guys are when they file their IPOs, and we’re left with just those 21 days to figure it all out.

From a company standpoint, I can see the appeal – there’s not a lot of confidence there, so they don’t want to make a big fuss, and instead of jumping right in and showing off, it’s a way to just get their toes wet; they can always run back to mommy if their feet get cold.

That’s how I see it. Companies like Twitter can get away with it because they are already in the public eye. They don’t need to make any big announcement.

That doesn’t mean these companies aren’t worth a closer look though. Even if I don’t always necessarily like the lack of numbers, investing in these secret IPOs isn’t always a bad idea.

Looking Back

If we go back further to when the JOBS Act fist kicked off, there were a slew of make-it-or-break-it moves as startups filed for IPOs in secrecy. Companies we had little to no idea about created a lot of headaches as they burst onto the scene.

It’s hard enough to analyze a company that is already established, let alone one that comes out of nowhere, with little to nothing to show for itself. Historical data is virtually nonexistent.

These companies will tell you they filed in secrecy are because their sensitive financial information is kept away from their rivals during a crucial fundraising period.

Testing the waters is what it comes down to in the end. Can these new companies tread water with everybody else in the market, or do they have to run back to shore and get their floaties?

As many as 75 percent of companies that file for an IPO will ultimately decide not to go public, according to DealBook.

Others may have wished they didn’t. Look at Chegg, who went public in November. Its shares have fallen 43 percent below its IPO price. But then again, even Twitter’s shares went spiraling down after the company reported disappointing earnings its first go round. If we look at Twitter today, their price has more than doubled and bounced right back.

For others, unfortunately, filing under the JOBS Act was a disaster, proving that sometimes when you “test the waters” you actually drown – the Ryan Leafs of the investment world, I like to call them, who totally flop.

The Jig Is Up

But even knowing all that, these smaller startup companies are still compelling. The risk is huge, sure, but the reward could make it all worth it in the end. And if you look at it right, maybe some of these companies aren’t a bad gamble, but just a different type of gamble than we’re used to.

Investing might mean taking a different strategy than we normally would.  We now have to mainly go on what kind of players are on the team, how they plan on using funds that are being generated from the IPO, as well as placement in the market.

Take GoPro, for example. It’s a company with a significant amount of revenue under its belt already, and it is drawing a lot of attention around the Winter Olympics.

It makes a video camera that is used extensively by extreme athletes and everyday adventurers. You know when they show you a personal view of a rider skiing/snowboarding down a mountain; you get to follow all the twists and turns like you were actually riding down the mountain yourself? That’s usually shot by a GoPro.

GoPro is a household name already, so you can approach the IPO as a brand investment opportunity. We might not know the numbers yet, but we have a pretty firm grasp on the brand’s cachet.

Former Disney CEO Michael Eisner is often credited with this nugget of wisdom, “A brand is a living entity—and it is enriched or undermined cumulatively over time, the product of a thousand small gestures.”

Every point-of-view shot from an Olympic athlete is actually brand enrichment for GoPro, even if it’s not shot on a GoPro!

So instead of looking at an emerging company that files in secrecy with skepticism, maybe it’s worth it to go that extra mile and find out what they’re really all about.

Filing for an IPO in secrecy has already been called the “new normal,” especially for tech companies that are on the move.

Do I think they’re scared? Yes. Do I still think it’s worth a look? I sure do.

I would start with Opower. You can’t go on brand, and you can’t go on financial history, but I’ll give you a tip: you can start with Google’s acquisition of Nest and take it from there.