Welcome to the 552 newly Not Boring people who have joined us since Monday! Join 83,196 smart, curious folks by subscribing here:
Hi Friends 👋,
Happy Thursday! This is a unique one over here at Not Boring: it’s a Sponsored Deep Dive (you can read more about my Sponsored Deep Dive selection and thought process here), but it’s not sponsored by the company I’m writing about. I’m writing about Rivian’s IPO, but the piece is sponsored by SoFi.
Before we get to the piece itself, I want to say a few words about why I’m writing it.
SoFi is the only place regular retail investors can buy IPO shares of Rivian at the same time as the institutions. Retail investors getting IPO access is a new phenomenon, so we need new resources.
A typical Initial Public Offering follows the same pattern:
- A company decides to go public.
- That company chooses a syndicate of investment banks as its underwriters, including a lead-left underwriter, the bank responsible for running the process.
- The banks help the company file an S-1, the offering document full of company details and the narrative they’re trying to tell the market, and run a roadshow for the company, in which the company’s management team pitches itself to prospective institutional investors.
- Investment banks release research reports that they give only to their institutional and high net worth (HNW) clients.
- All of the underwriters get an allocation of shares, which they sell to their institutional and HNW clients at an agreed upon listing price to support the IPO. Typically, the company wants investors who aren’t just going to turn around and sell their shares immediately.
- On IPO day, shares start trading, and retail investors, like you and me, are able to buy shares from the institutions and HNW individuals who bought them directly from the investment banks.
Nasdaq laid it out clearly in this graphic:
The problem is, if you’re a retail investor, you’re probably going to pay significantly more than the institutions and HNW individuals. That’s a big part of the IPO pop: the difference between the price at which the institutions buy and where the stock closes its first day of trading. According to Nasdaq’s Jay Ritter, the average IPO pop from 1980 to 2020 was 18.4%. It was even higher for tech companies -- 31.2%!
If you follow Benchmark’s Bill Gurley on Twitter, you know that he thinks the IPO pop, and the whole IPO process, is bad for companies. It means tech companies earn 30% less cash than they could for selling the same number of shares directly to the market. It’s also bad for retail investors, like us. It means that we can pay a 20-30% premium to the prices that well-connected institutions paid just hours earlier!
(This should go without saying, but not all IPOs pop! Some crash. DYOR.)
The trade that the companies were making was that they believed that these large institutional buyers would support the offering and hold the stock, giving them sturdy investor bases who would stick with the company and support its price in the public markets.
The traditional IPO model was built for a different time, when private companies were less well-known to investors, and when retail investors were less active direct market participants. Now, software is eating the markets, and retail is getting involved.
And the IPO process is changing, too.
When Rivian, which makes electric trucks and SUVs, goes public next week, two groups will be able to invest in the companies IPO shares at the listing price in addition to the usual suspects:
- People who are on the waitlist to buy its trucks and SUVs, through a directed share program (DSP) -- Rivian is setting aside 7% of shares for pre-orderers!
- Retail investors who use SoFi.
That’s why we’re here today. I partnered with SoFi to give my take on Rivian and the company’s IPO. Institutions and HNW individuals have access to sell-side research reports; you’re stuck with me.
Rivian’s IPO will be one of the biggest and most hotly-anticipated of the year. SoFi will have no trouble finding buyers to fill its allocation. But this is the very early innings of a transition in which retail investors will hopefully get more and more access to IPO shares in the best deals. Companies are often nervous about retail investors, though. They’re worried we’re less likely to hold shares and more likely to sell on a pop. In order for retail to get more direct access, we need to not fuck it up. That means understanding what we’re buying, or not, and why. Knowledge makes the diamond hands.
So today, we’ll explain the Rivian thesis and some risks so you’re ready.
Disclaimer: This is not investment advice. I am not a registered investment adviser. We don’t know where Rivian will price. You should do your own research. This is just a starting point.
Let’s get to it.
I’ll tell you this about Rivian’s R1S SUV and R1T pickup truck: they drive.
It shouldn’t need to be said, but thanks to Nikola Motors, it does. Last year, in the face of growing skepticism over whether or not its Nikola One truck actually worked, Nikola released this promotional video, “Nikola One In Motion”:
Rivian R1T, Motor Trend
Lucid Air, Inside EVs
Tesla Short Shorts, which they sold for $69.420
Rivian R1T on Stage, Engadget
Automotive Revolution, McKinsey
Global EV Uptake Accelerating, Goldman Sachs
The New York Times
RJ Scaringe, LinkedIn
RJ & Riri at the Los Angeles Auto Show (2018), USA Today
Rivian’s Skateboard Chassis, WIRED
Rivian Factory in Normal, Illinois, New York Times
Rivian Chicago Showroom
Rivian Adventure Network
Sampling of Comments on KBB YouTube Review