Why all the IPOs? Be Careful!

Facebook’s  IPO was scheduled for today as I put together this post.  I believe that it will be one of the largest IPOs in history behind GM.  Perhaps on valuation, it could surpass GM but we will see.   As mentioned previously, I am not a stock guy and my understanding of IPOs is limited, however common sense tells me that some companies are rushing to take advantage of the IPO spree that we appear to be on.

I am not implying that Facebook needs money or is rushing into an IPO but the timing of their offering gave me the thought to revisit the crash where “fly by night” organizations were popping up all over the place.

After years of flat-line growth following the financial collapse 12 years ago, IPOs appear to be alive and well.  Many industries are taking part.  The chart below courtesy of Renaissance Capital shows the upward trending that is happening with MORE IPO's ALREADY through April 2012 than at any time going back to 2000.  

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Are these companies built to last?  A few seem to have debuted recently with minimal vision for the future.  I visited the past and the implosion that happened in the dot.com era which eventually brought about the bubble burst and many people who were caught off guard lost everything.  Don’t look now, but the same thing may  be happening…The indicators to me show that the majority of these IPOs lack strong leadership, vision, direction & purpose. 

• Do your homework on your IPO and why it needs the cash...

• Will the loss of autonomy be a burden to the new publicly traded company as it relates to increased reporting and competencies?  How will their competition and customers react to the increased communications that will be required? 

• Cutting corners to build  a company base ~ Are the plans in place to market the new product?  How much has been done to carefully plan out the launch?  Are the leaders in place the right people?

• What is the potential market?  Are they marketing one product or many?  Who are their competitors?  What value does the product bring above and beyond currently available products?

• Do they have positive cash flow now?  Why is the IPO needed?  Is it for expansion or is it to buy back shares or pay off debt?

• Where did the executive management come from?  Have they hopped around from one start-up to another?  There is a “network” of executives in many industries that appear to be jumping from one company to the next.  Getting rich quick and leaving shortly after the IPO happens. 

The bottom line is that many companies today do not seem to be focused on long-term outlooks but rather the immediate returns that can be significant in the short-term.  In no way am I an expert on stocks or investing. I wanted to post this simply as an alert to some of the observations that I have seen as it relates to management of these start-ups.  If you have additional comments, please post, we can all learn from your thoughts.  Thanks!