Predictably, Poshmark’s stock experienced a significant surge today, increasing by over 130% during afternoon trading compared to the company’s initial public offering price of $42, which was already set above expectations. This remarkable and highly publicized launch follows a similar enthusiastic reception in the public markets yesterday for Affirm, another newly public company.

These substantial initial gains follow impressive December IPOs from companies like C3.ai, Doordash, and Airbnb. Currently, it appears that any company supported by venture capital and identifying as a technology-focused business is benefiting from favorable IPO pricing and substantial gains on its first day of trading.

This trend is understandably frustrating for some individuals. Specifically, certain members of the venture capital industry might prefer to retain a larger portion of the profits for themselves. However, regardless of these perspectives, it’s natural to question the reasons behind this phenomenon. Let's explore the contributing factors.

Here’s how to achieve a substantial initial public offering (IPO) increase on the first day

TechCrunch has closely monitored the IPO landscape over the past several years, along with the dynamics of late-stage venture capital and the fluctuating value of technology stocks, as well as the significant increase in investment from individual (retail) investors.

Drawing from my involvement in covering these developments, here’s a breakdown of how a company can experience a 130% jump in its stock price on its first day as a publicly traded entity, assuming it has a sufficient operating history for investors to reasonably project future growth and profitability:

1. Operate within an environment of extremely low interest rates. This results in inexpensive borrowing costs, unattractive bond yields, and a reluctance to hold cash. Consequently, a large volume of capital flows into more speculative investments, such as stocks. A substantial amount of money also finds its way into alternative investments, like venture capital funds.
2. Direct significant capital into startup businesses. This is readily achievable given the substantial funds currently available to venture capital firms.
3. Extend the period companies remain private. With ample funding, venture capitalists can support startups for longer durations and with larger overall investments. This allows these companies to build stronger brand recognition prior to their IPO, thereby increasing demand for shares among public investors before the listing occurs.
4. Benefit from increasing demand from retail investors. Platforms like Robinhood and its competitors have dramatically lowered the costs associated with brokerage services. Investing is now often commission-free, contributing to the surge in retail trading activity. This increased participation translates to more potential investors seeking to purchase shares of newly public companies, even if they were not allocated shares in the initial offering.
5. Exist in a market influenced by risk-taking, speculative trends, and irrational exuberance. This is not a criticism of Robinhood, but rather an observation regarding the tendency of individuals to engage in impulsive investment behavior.
6. Operate during a period where COVID-19 disrupted numerous industries while simultaneously benefiting technology companies. Last year saw a shift in investment towards technology stocks as many sectors faced challenges. Software emerged as a favored investment area, and as long as the pace of digital transformation continued to accelerate, the potential market for software appeared limitless. This led to increased valuations, creating a favorable environment for technology IPOs.
7. Introduce well-known companies to the public market.
8. Observe how accumulated demand, strong retail interest, readily available capital, established startup brands, speculative investors, and a general market preference for technology as a source of growth and returns combine to create a significant market reaction.

The culmination of these factors, as I understand it, has enabled many companies to price their IPOs at levels that would have been considered excessive in previous years. Upon commencement of trading, their stock prices often double as retail investors rush to acquire shares, and those who secured IPO allocations hold their positions, anticipating substantial gains.

High demand coupled with limited supply drives up the price.

This does not necessarily indicate that companies like Affirm are genuinely worth $87 trillion, or that Poshmark is truly valued at over $130 per share. However, it does offer some insight into the reasons why the market currently feels so unusual.