Tech IPOs are being badly mispriced, as Lemonade and Agora double in market debuts

• Lemonade, an insurance-tech company,soared 139% in their debut on Thursday to $69.41.
• The offering comes a week after Chinese software company Agora jumped more than 150% in its first day of trading.
• "They are ignoring demand when they price. On purpose," said venture capitalist Bill Gurley of Benchmark.

Technology is moving at warp speed during the coronavirus pandemic, but the IPO process is stuck in place.

For a second straight week, a tech company has more than doubled in value upon its stock market debut. Last week, it was Chinese cloud software developer Agora, which surged 150% in its first day of trading on the Nasdaq. And on Thursday, insurance-tech company Lemonade jumped 139%.

Tech IPOs have long been criticized for a process that lets investment bankers hand over underpriced stock to large public money managers, who often enjoy immediate and massive pops before ordinary investors are able to participate. Meanwhile, the issuing company ends up raising far less money than it could.

Over the past four months, with face-to-face meetings off the table, IPO roadshows have gone virtual. Management teams, with the help of bankers, are selling their story over Zoom rather than spending two weeks traveling to the money hubs of New York, Boston, Baltimore and San Francisco.

While they may be saving money on travel, they're still leaving piles of cash on the table. Lemonade sold 11 million shares at $29 a piece, bringing in just over $300 million and giving new investors the $444 million difference, based on the closing price of $69.41. That's a big deal for a company that had cash and cash equivalents of about $567 million before the IPO.

"They are ignoring demand when they price. On purpose," said venture capitalist Bill Gurley of Benchmark, in a text message. "This problem is systematic. Because the system is broken."

Gurley, who has been among the loudest IPO skeptics, posted a similarly themed tweet after Agora's IPO, expressing amazement "that there is a financial exercise on this planet involving hundreds of millions of dollars where its OK to not even get to 50% of the actual end result."

 A Lemonade spokesperson declined to comment and an Agora representative didn't respond to a request for comment.

In a video interview last week following Agora's IPO, CEO Tony Zhao told CNBC that the "roadshow went well," and that he got good feedback from 30 to 40 different investor groups. Zhao participated in meetings from China while Chief Operating Officer Reggie Yativ joined from Silicon Valley, where the company also has a big presence. 

"They encouraged us to keep focused on long-term things and said they appreciate our strategy," Zhao said.

Agora's software powers communications systems and allows developers to easily embed video or voice tools into their applications. Revenue almost tripled in the first quarter to $35.6 million, as demand soared from customers dealing with a Covid-related spike in online communications .

Agora raised about $350 million in its IPO for shares that, by the end of the first day of trading, were worth over $880 million. The stock rose from its IPO price of $20 to $50.50 on day one, and closed Thursday's session at $56.49.

"At a macro level, you have an enormous amount of optimism about the future of technology," said Glenn Solomon, a partner at venture firm GGV Capital, which is an investor in Agora. "At a micro level, it's a challenge. You have bankers trying to price offerings based on some reasonable valuation multiple while the market is paying up for new names and growth."

Solomon, who offered his views by text, said he's in agreement with Gurley about the need for a "better system where the market can set price for IPOs in a more efficient manner." Gurley has been trying to get companies to follow Spotify and Slack in pursuing direct listings, which allow existing investors to sell shares at a market-clearing price.

Lemonade priced its IPO at $29, after previously increasing the range to $26 to $28 from $23 to $26. Still, the debut price valued the company at $1.6 billion, below a private market valuation of about $2 billion last year.

Lemonade's revenue more than doubled in the first quarter to $26.2 million, in part because, with consumers stuck at home, the company is set up to automate the insurance buying experience and to let company representatives write insurance plans remotely. Lemonade has artificial intelligence bots named AI Maya and AI Jim for handling customer calls and claims.

"Our customers' experience with Lemonade is likewise largely unaffected by the turmoil, as AI Maya and AI Jim chat with customers, wherever they may be, without triggering concerns about social distancing," the company said in its prospectus.

'Uncertainty always brings a discount'

Matt Oguz, an investor in Lemonade, wasn't involved with the pricing of the deal or in the roadshow, though he said the process moved "very fast" and that there was a lot of new investor interest. Raising over $300 million at a time of economic and financial turmoil is a significant feat, he said, even if the pricing wasn't on target.

"Uncertainty always brings with it a discount," said Oguz, who is a partner at the firm Venture Science. "On one hand you're getting a lot of money right up front. On the other hand, if a pop like this happens then you may be leaving money on the table."

There's more to the story than the first-day pop, said Lise Buyer, co-founder of Class V Group, which assists start-ups as they prepare to go public. Plenty can happen in the ensuing months that can cause the stock to move much higher or lower. 

While Buyer acknowledges that "too many companies do appear to leave too much on the table," she said there are other factors that go into the pricing, including management's effort to  account for employee morale and potential risks to the business.

"Just because a stock may trade way up in a frothy, volatile market we have now, doesn't mean that the top price is sustainable," Buyer said, in an email. "As management teams have to be responsible to their employee base, they often choose to price to a value the fundamentals support as opposed to the price the market wants to pay today.  One can really only tell if a deal was seriously mispriced if it maintains the opening trade price several months later."

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