A Parade of Unicorns

T’is the season.  IPO season.  The winds are behind the market’s back and the window to parade out shiny new IPO’s is open.  After all, investors get tired of talking about the same, boring companies.  We all crave sizzle.  So, the Bankers have arranged for a great parade.  A 'Parade of Unicorns' such as Lyft, Zoom, Pinterest, Slack, and the biggest unicorn – UBER.
 
So what IPO are you buying?  This is a question I get often.  And I have a boring answer.  None.  It's not that I am not interested in shiny new objects.  I get enamored by fast-moving-rocket ships just like the rest.  But I have investment rules - and staying away from IPOs - is one of those rules.
 
As usual, a small number of IPO’s today will be the great companies of the next decade.  If you have that unique insight, you should jump aboard.  But it is difficult because we don’t have enough information.  It’s no different than picking players in an NFL or NBA draft.  The majority won’t pan out.
 
Here are three reasons to stay away from IPO’s.
 
1.       An IPO is a Cinderella tale.  The Banker ‘s involved in selling the deal, first take stock of the prevailing investment narrative.  Then they hatch a plan with management to show the ‘story’ in company financials.  For example, if investors are thirsty for growth at all costs, the company goes for broke a year prior to IPO.  If investors are campaigning for spending discipline, then the Company pursues margin improvement.  Get it?  However, in most cases post IPO - when the clock strikes midnight and business conditions sour- the business model, and cash flow turns into pumpkin and mice.  Believe me, I have IPO scars to prove it.
 
2.       An IPO represents the uber-smart, insider, early investor who is selling.  Bill Gurley, at Benchmark, a great Technology investor, will be a seller in the UBER IPO.  Do I want to be the buyer on the other end?  No.  What asymmetric information advantage do we have over Bill Gurley?  None.
 
3.       But most importantly, acting on an IPO is acting on sellers’ terms.  As investors, we want to act when the time is right for buyers to buy, not when its right for sellers to sell.  It is easy to say and very hard to do.  And therefore, as investors, we need a rules-based process.  According to poker player and author of ‘Thinking in Bets’ Annie Duke, it is much easier to decide and stick to ‘I won’t eat any carbs’ vs. ‘I will try to limit carb intake’.  The former is one, firm, commitment vs. the latter is a meal-by-meal judgment.  The former is much easier to execute.  The reason most diets fail is that most of us do the latter. 
 
I am staying away from the oncoming IPO frenzy because it is part of my rules-based process.  Before you decide to invest in an IPO, ask yourself one question.  Why do you want to take on Bill Gurley?

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​This material does not constitute an offer or solicitation to purchase an interest in Latticework Partners, LP (the "Fund").  Such an offer will only be made by means of a confidential offering memorandum and only in those jurisdictions where permitted by law.  An investment in the Fund is speculative and is subject to a risk of loss, including a risk of loss of principal.  There is no secondary market for interests in the Fund and none is expected to develop.  No assurance can be given that the Fund will achieve its objective or that an investor will receive a return of all or part of its investment.

This material contains certain forward-looking statements and projections regarding the future performance and asset allocation of the Fund.  These projections are included for illustrative purposes only, are inherently speculative as they relate to future events, and may not be realized as described.  These forward-looking statements will not be updated in future.