When a privately held company first goes public and sells shares to the public, that’s known as an initial public offering. Some IPOs are legendary. Many banks, telecom and social media giants had record-setting IPOs that people still talk about today.
Not every company is so lucky. Even some highly anticipated IPOs don’t live up to expectations. Some of the biggest IPO flops date to the dotcom boom of the late 1990s and early 2000s. Many of these were innovative ideas designed to disrupt a dated way of doing business.
One of the best examples of an IPO gone wrong is Pets.com. During the late 1990s, Pets.com launched as an online pet supply store. Though it had several competitors in the space, this company also had lots of momentum. Its mascot connected with customers in a big way, making it into the Macy’s Thanksgiving Day Parade.
In the late 1990s, Pets.com attracted investment from internet giants like Amazon. Its IPO in 2000 raised over $80 million. Yet this company still ran into trouble. Sales of staple products like bulk food were slow, in part because shipping was so expensive. Stock prices went from a high of $14 to a low of 22 cents. Pets.com went bust just nine months after the IPO.
During the early aughts, Vonage was the biggest name in VOIP in the United States. The company was growing quickly, and attracted lots of investment. The downside of this rapid expansion was that Vonage struggled to scale up, losing money from 2001 to 2006. Vonage decided to raise money by selling stock.
The IPO raised over $500 million. On the surface, it looked like a success. However, Vonage had taken a new approach. In addition to offering shares to investment firms and qualified individual investors, Vonage offered shares to users. On the day of the IPO, a glitch for Vonage customers caused trouble.
Customers were told their transactions hadn’t gone through. Days later, charges hit their accounts. The charges were for the initial stock price of $17. However, in the time between the glitch and the finalized purchases, the stock had lost 30% of its value.
IPOs should be pursued with caution. These can be exciting investments, but they are notoriously hard to evaluate. Even companies with lots of momentum can have rocky IPOs.