IPOs, SPACs, & Direct Listings

Copyright © 2021 Nam Viet Nguyen

All rights reserved. No part of this publication may be reproduced, distributed, or transmitted in any form or by any means, including photocopying, recording, or other electronic or mechanical methods, without the prior written permission of the publisher, except in the case of brief quotations embodied in critical reviews and certain other noncommercial uses permitted by copyright law. For permission requests, write to the publisher, addressed Attention: Permissions Coordinator, at the address below.

ISBN: 978-1-7371834-1-9 (Paperback)

978-1-7371834-2-6 (Hardcover)

978-1-7371834-0-2 (eBook)

Library of Congress Control Number: 2021938711

All content reflects our opinion at a given time and can change as time progresses. All information should be taken as an opinion and should not be misconstrued for professional or legal advice. The contents of this book are informational in nature and are not legal or tax advice, and the authors and publishers are not engaged in the provision of legal, tax, or any other advice.

Front cover image by 100Covers

Book Design by FormattedBooks

Printed by Nam Viet Nguyen in the United States of America.

First printing edition 2021.

www.namvietnguyen.com

DEDICATION

For my wife Tram, who supports my various endeavors with words of encouragement.

For my son Remy, for whom I want to provide a better life just like my parents did for me.

For my parents Hong and Mai, a special dedication in their native tongue:

Tôi muốn cảm ơn ba mẹ tôi, người đã rời bỏ quê hương và hy sinh tất cả để đem lại cho tôi một tương lai tươi sáng.

ACKNOWLEDGMENT

Thank you to M.K. Williams, who coached and guided me throughout the writing and publishing process.

Thank you to Nhan Le, Spencer Yoon, Allen Pham, Raymond Dipasupil, David Nguyen, Albert Martinez, and Jose Elamparo for sharing their valuable inputs.

Thank you to Sara Bruya for her editorial input.

CONTENTS

Chapter 1 Introduction

Part 1 — How Does a Company Go Public?

Chapter 2 Initial Public Offering (IPO)

Chapter 3 Special Purpose Acquisition Company (SPAC)

Chapter 4 Direct Listing

Chapter 5 The Spin-Off

Chapter 6 A Unicorn Goes Public

Part 2 — Evaluating IPO Opportunities

Chapter 7 My Background & Experience

Chapter 8 Navigating the S-1 Prospectus

Chapter 9 Research & The IPO Tool Kit

Chapter 10 Innovative Products

Chapter 11 Dominant Market Share

Chapter 12 Win A New Category/Solve A Problem

Chapter 13 Big Profits

Chapter 14 Total Addressable Market (TAM)

Chapter 15 Essentials

Chapter 16 Global Reach

Chapter 17 Secular Trends

Chapter 18 Risks

Chapter 19 Corporate Culture

Chapter 20 Valuation

Chapter 21 SPAC Valuation

Chapter 22 Brand Equity

Part 3 — Should I Invest?

Chapter 23 When Do You Hold Forever?

Chapter 24 Is this IPO going to the moon🚀?

Chapter 25 Conclusion

CHAPTER 1

Introduction

Over the years, I would get countless text messages asking me, Should I invest in this IPO?. Friends, family, and colleagues would reach out and ask for my thoughts on the latest hot IPOs and I would spend hours trying to explain how it works and why they should invest or not. I would write long emails or text messages, spend hours on the phone, forward finance articles, and do simple valuation calculations on napkins at happy hour.

Enthusiastic about all the questions and being afraid I might have missed an important detail in these conversations, I tried in earnest to find a book for my friends to read so they could get a feel for what IPOs are and how to go about investing. I found that most finance books are inaccessible, often requiring a finance or business undergraduate degree to understand the dense finance jargon. The books I found were full of theories and outdated examples of companies that aren’t relevant today. I realized most people don’t need a rundown of the efficient market theory or a hundred years of economic history.

Most people just wanted to know two things:

What is an IPO and how does it work?

Should I invest in the IPO?

I wrote this book to answer those two questions for all my friends and family that have asked and for anyone that might have posed that question before.

I try to keep it simple. The book starts by explaining the various ways a company can go public and then I share my research framework to determine whether it is a good investment or not. If we determine it’s a good investment, I’ll try to convince you to hold it for the long term. I wanted to use fun and contemporary examples of companies we buy from and interact with every day. I wanted to have memorable illustrations that brought my ideas to life. This is a book for those who choose to be active, want to learn about individual companies, and buy individual stocks with the goal of earning great returns over the long term. Overall, I wanted to share everything I had learned about IPOs and stocks in a short and enjoyable read. When the Covid-19 pandemic shut everything down, I finally found the time and energy to put pen to paper and write the book I would be proud to share with aspiring investors.

I hope this book empowers you.

CHAPTER 2

Initial Public Offering (IPO)

What is an Initial Public Offering (commonly referred to by its acronym IPO)? Let’s start with the basics and define what an IPO is and ponder why a company would even want to take their business public to trade on a stock exchange. We’ll then walk through the process of how they do that exactly.

Why Go Public at All?

In an Initial Public Offering, a company for the first time offers its equity shares (ownership in the company) to the public. They will choose an exchange such as the New York Stock Exchange (NYSE) or the Nasdaq and those shares will trade publicly, allowing anyone with a brokerage account to buy and sell the shares.

Let’s use an example of a start-up to walk through what it takes to reach the IPO stage. This start-up has been around for a few years and has had various venture capital investments (these are made by rich investors in the early days before any profit is made by the company, providing a leap of faith investment) and years of steady revenue growth. The IPO represents the first time public investors will have an opportunity to invest in the company. Retail investors, like you and me, along with mutual funds and hedge funds who are known as institutional investors, will be able to own shares in the newly public company.

The IPO will allow the company to sell a portion of itself—let’s use an example of 10%—to raise additional capital. Let’s say the company is going public at a $10 billion valuation, so 10% of equity up for sale means they are attempting to raise $1 billion by selling that amount of stock. The $1 billion they raise by selling stock will go into their cash line item on the balance sheet and be ready to use for expanding and growing the business.

There are many reasons for a company to transition from a private company into a public one. The largest driver is the need for more capital to grow. Simply put, they want more cash on their balance sheet to implement growth initiatives and will sell ownership in the company (equity) to fund it. Examples of growth initiatives could be opening a second factory to manufacture, building a new branch or headquarters, launching a new product line, etc. The company will have exhausted a long list of venture capital rounds (private shares sold to venture capitalists to raise money while the company is still young) and believes it is ready and mature enough to withstand the rigors of a public market, which requires quarterly earnings reports and various disclosures. An IPO will also allow venture capitalists who invested in the company early to sell their shares and exit, hopefully reaping gains. It will also allow the founders and employees a chance to sell their stock so they can also reap the rewards from their early commitment to the company.

Employees of a start-up often look forward to selling their shares so they can buy homes, cars, pay for school, etc. Employees selling stock should not be seen as a lack of belief in the company’s prospects; it’s more likely that they sacrificed higher pay in the start-up phase for those early equity shares. Those shares were granted early on in place of a higher salary to incentivize employees to work hard and potentially enjoy large gains the company goes public. For founders and employees, there is usually a lock-up period that prevents these holders from selling within the first six months of the initial public offering, to prevent a torrent of selling that can depress share price performance.

As I mentioned earlier in this chapter, the company’s employees have been granted shares and this is the first time they can sell them. All company employees must hold onto the shares for around six months or more after the IPO before the lock-up period expires, and they can freely sell. This is implemented so they can avoid a big block of the company stock being sold all at once which could cause the price to be depressed or crash.

Hiring an Investment Bank

Here is a flow chart to summarize all of the steps involved in an IPO.

Exhibit 1 – The Initial Public Offering (IPO) Process

In addition to raising money, an IPO can allow some early investors to sell their shares to the public at the same time as well. To make it simple, let’s assume no early investors sell. In this case, the entire $1 billion raised will go into the company’s balance sheet as cash. When starting to explore a possible IPO, the company will usually hire an investment bank to help gauge interest and market the shares to potential investors.

Think of investment banks as salespeople and the product they are selling are companies. More specifically, they are selling fractional ownership of companies. Similar to real estate agents or car salesmen, they know a lot about their products and are considered experts in various companies across numerous industries. Similar to cars and real estate, no two businesses are exactly the same and have different qualities that will determine their price. Ultimately, the job of an investment bank is to generate interest in the company they are selling.

The investment bank analyzes the financial statements and prospects of the company and builds a presentation to help explain why the company is a great investment to potential institutional investors, including mutual funds, pension funds, and hedge funds. The investment bank also puts together the S-1 initial registration form or simply S-1 for short. This is often also referred to as the prospectus. This document will cover financial statements, plans for the capital raised, risks, the definition of terms, an overview of the management team, market dynamics, competitors, and ultimately why this company is a great asset to own. Remember, the investment bank is marketing and selling this company, so it is in their best interest (and their client’s best interest) to present the company in the best light possible.

Chapter 8 and beyond will be dedicated to navigating, understanding, and analyzing what is reported in the S-1 so we can answer the question: Should we invest in this company?

Going on a Roadshow

Investment banks only market to institutional investors such as pension funds and mutual funds because these funds collectively manage billions of dollars and have the ability to invest and buy millions of shares. The marketing process would be burdensome if management were instead to meet with millions of retail investors who can only buy a few shares at a time.

These important institutional investors get to meet the management team face to face when the investment bank flies the company’s management team on a multi-city trip called a roadshow to meet these powerful potential investors in financial centers including New York, San Francisco, Boston, Los Angeles, London, and Hong Kong. The investment bank’s efforts are focused on garnering interest and leveraging their connections to create demand for these IPO shares. The investment banks are looking for investors who will buy these shares with the intent of holding for the long term. While the roadshow allows for the company to tell its story, it also allows institutional investors to present themselves as long-term investors that