What criticisms do investors have of the traditional IPO process?

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Investors Criticise Traditional IPOs for Unfair Share Allocation and Potential Underpricing

Investors have voiced significant criticisms regarding the traditional Initial Public Offering (IPO) process, labelling them as "chummy deals" that favour a select group of top clients of investment banks. This perceived preferential treatment means that many investors, including angel tech investors, are often "snubbed" and have little to no chance of acquiring shares in popular IPOs. Furthermore, there is a prevailing suspicion that bankers may intentionally underprice shares to generate a first-day trading "pop," a practice that can result in substantial dilution and is seen as suboptimal for both the company and its existing shareholders.
Unfair Allocation to Top Clients

A primary grievance among investors centres on the allocation of shares during IPOs. It is widely believed that investment banks, acting as underwriters, reserve the majority of available shares for their most valued clients. This practice effectively excludes a broader base of potential investors, such as angel tech investor Phil Hellmuth, who noted his inability to secure shares in the Snowflake Inc. IPO despite significant efforts. This exclusivity means that many interested parties miss out on the potential gains associated with a successful market debut.
"Sub-optimisation" and Banker Self-Interest

Concerns have been raised that the traditional IPO structure allows investment bankers to "sub-optimise" the process and benefit themselves disproportionately. Entrepreneurs and investors alike feel that bankers have historically taken a larger share of the potential value from IPOs than is equitable. This perspective suggests a misalignment of interests, where the focus may shift from maximising value for the issuing company and its shareholders to securing greater fees or advantages for the intermediaries.
Suspicion of Deliberate Underpricing for Trading "Pop"

Another significant criticism is the suspicion that bankers deliberately underprice IPO shares. The objective behind this alleged strategy is to create a noticeable increase in share price on the first day of trading, often referred to as a "pop." While this can create positive buzz around a newly listed company, it also implies that money is being "left on the table" – value that could have been captured by the company and its initial investors but instead accrues to those who acquire shares at the artificially low opening price. This practice can lead to significant dilution for existing shareholders and is seen as an inefficient method of price discovery.
Suboptimal Outcomes from Underpricing and Dilution

The consequence of underpricing, as experienced in processes like the Snowflake IPO, is significant dilution. This occurs when the initial offering price is substantially lower than the stock's true market value, leading to a less optimal outcome for both the company and its existing investors. The current structure, where shares are not always optimally priced, contributes to this dilution, prompting a search for alternative methods of going public that offer a fairer price-discovery process.

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What criticisms do investors have of the traditional IPO process?

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