I generally evaluate IPOs by separating the business from the stock. A great company can still be a poor investment if it's priced too aggressively or if the market dynamics create selling pressure.
Here's the framework I'd use.
1. Start with the S-1: What is the company really telling you?
The registration statement is often more informative than the marketing around the IPO.
Things I pay close attention to include:
- Revenue growth: Is growth accelerating or slowing?
- Gross margins: High and improving margins often indicate pricing power.
- Customer concentration: If a handful of customers generate a large share of revenue, that's a meaningful risk.
- Retention metrics: Net revenue retention above 100% is a positive sign for many software businesses.
- Cash flow: Free cash flow is often more revealing than adjusted EBITDA.
- Share structure: Multiple voting classes can reduce shareholder influence.
- Stock-based compensation: Excessive dilution deserves scrutiny.
- Use of proceeds: Is the company raising capital for growth, or simply providing liquidity to existing investors?
2. Lockup expiration is a real event
Most insiders are prohibited from selling immediately after the IPO.
Common lockup periods are around 180 days, although they can vary.
The risk isn't that insiders sell because they lack confidence—it may simply be the first opportunity many employees and early investors have had to diversify.
I usually look at:
- How many shares become eligible for sale?
- What percentage of the total float does that represent?
- Are venture funds nearing the end of their fund life?
- Is insider ownership still very high?
A large increase in tradable shares can create temporary downward pressure even if the business is performing well.
3. Watch valuation, not just quality
Outstanding businesses sometimes debut at valuations that assume years of perfect execution.
Questions I ask include:
- Enterprise value to sales relative to peers
- Growth-adjusted valuation
- Gross margin profile
- Profitability timeline
- Market size assumptions
Sometimes the better investment is waiting six to twelve months after the IPO if expectations cool.
4. Post-IPO patterns I often see
There isn't a reliable pattern that every IPO follows, but historically several tendencies show up:
- Strong first-day "pop" doesn't necessarily predict long-term outperformance.
- Many IPOs experience elevated volatility during their first few months.
- Quarterly earnings reports often matter more than the IPO itself because investors finally see how the company performs as a public business.
- Lockup expirations can increase volatility, though the impact varies.
- Companies with durable earnings growth tend to be driven by fundamentals over time rather than IPO-day enthusiasm.
5. Red flags in an S-1
Some issues that merit closer examination include:
- Revenue growth slowing sharply before the IPO.
- Heavy reliance on non-recurring or one-time revenue.
- Large losses with no credible path toward improving unit economics.
- Rising customer acquisition costs without corresponding gains in lifetime value.
- Frequent changes in key operating metrics.
- Extensive related-party transactions.
- Legal or regulatory risks that could materially affect the business.
- Aggressive adjustments to present "adjusted" profitability.
One red flag alone doesn't necessarily rule out an investment, but several together warrant caution.
6. Catalysts after the IPO
After a company lists, I pay attention to:
- First and second earnings reports
- Insider selling after lockups expire
- Analyst estimate revisions
- Guidance changes
- New product launches
- Customer wins or losses
- Macroeconomic conditions affecting the sector
The first year often provides a much clearer picture than the IPO roadshow.
What's on my radar?
Rather than focusing on a specific upcoming IPO without current market data, I'd group areas of interest by themes:
- AI infrastructure (semiconductors, networking, data-center software)
- Cybersecurity
- Defense technology
- Financial infrastructure and payments
- Developer tools
- Industrial automation and robotics
- Healthcare technology with recurring revenue and strong reimbursement dynamics
For companies in these areas, I'd look for recurring revenue, expanding margins, reasonable customer concentration, and evidence that growth isn't being driven solely by short-term AI enthusiasm.
If you're thinking about participating in a specific IPO, I can also help analyze its S-1, estimate dilution and lockup risk, compare its valuation to public peers, and discuss how its fundamentals stack up.
