In Facebook IPO fiasco the 'smart money' got burnt

Summary:Small investors snubbed the Facebook IPO. It's the 'smart money' that's crying.

There's a lot of anger around the botched IPO of Facebook but much of that is from the "smart money" that wasn't able to convince retail investors, the regular people who invest in stocks, to take their shares.

The point of a "pop" in an IPO is to provide an incentive for retail investors to acquire risk -- the shares from investors and insiders, and then to continue holding that stock and limit volatility.

But the smart money had already decided what the stock was valued at because of trading activity in secondary markets, which was in a range of $38 to $42. The price was set by the secondary markets about a month before the IPO.

The opening price was set at $38 so that a 10% pop would leave as little "money on the table" as possible but that's not much incentive to take on a very risky investment.

The fact that retail investors disagreed with the valuation and largely stayed away is a very good sign because it shows that they made smarter decisions than the Wall Street bankers and their clients.

So let's not shed tears for the "smart money" they were the ones that literally bought the hype about Facebook's future prospects. Plus, the SEC isn't going to help them because they are considered to be sophisticated buyers that know the risks.

The good news is that few small investors bought shares; the bad news is that few small investors bought shares.

This means that the smart money, in its zeal to leave as little money on the table in the IPO (it's called fair pricing), has messed things up for future tech IPOs and prospects for getting their money out of their other positions. Greed has its consequences.

The Facebook fiasco also puts the spotlight on secondary markets and the role they play in helping private companies raise capital and for early investors to find an exit.

It should be good news for private stock markets such as Sharespost and Second Market because tech IPOs will be cutback leaving these markets in a great position as the only alternative to being acquired.

The problem for the smart money is that these private markets have little liquidity and share prices are far more susceptible to hype and manipulation than in public markets. It could quickly become be a dumb investment.

Topics: Start-Ups

About

In May 2004, Tom Foremski became the first journalist to leave a major newspaper, the Financial Times, to make a living as a full-time journalist blogger. He writes the popular news blog Silicon Valley Watcher--reporting on the business of Silicon Valley.Tom arrived in San Francisco in 1984, and has covered US technology markets for leadi... Full Bio

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