The wonderful folks over at Consumerist pointed out yesterday that online retailer Newegg has filed for their IPO — or Initial Public Offering to us non-Wall Street types. For those not in the know, Newegg sells software and electronics like laptops, digital cameras, TVs, and so on, for mega-cheap.
As Consumerist writer Ben Popken went on to say, Newegg is following in the footsteps of both Zappos and Mint.com, which were both bought in the past few months by much larger public companies that occupy similar market niches (Amazon for Zappos and Intuit for Mint.com). But that means Newegg is a little different than the others, just for the sheer fact that a famously customer-oriented retailer isn’t going to be under the leadership of another company.
Instead, Newegg will be directly held responsible by a group of shareholders. I will admit that many people have done a better job of explaining some of the issues surrounding IPOs and investing in startups (see this page in Neal Stephenson’s Cryptonomicon for a great example), but I’m a very visual learner, so I made some charts.
As you can see, Mint.com has to work with many more new elements than Newegg does, which could be a very good thing for Newegg and its founder, Fred Chang. The company will continue do its thing as long as it’s profitable enough to keep the shareholders happy, which shouldn’t be a problem if they keep their customers happy — and thus, coming back.
This is of course an immensely simplified version of reality: both Mint.com and Newegg had “shareholders” before they became publically traded companies. These shareholders, however, were the groups and companies that gave the startup some venture capital to get off the ground, not individuals investing for their portfolios.
Think of it like this: for a couple of years, your parents buy you art supplies and you draw them pictures that they think are amazing (or at least they tell you your pictures are amazing). Your parents frame them and give them to family members and close friends.
Then, after a while, you and your parents go out and decide that you could make even more amazing art if you had more money to buy supplies. So you go to the SEC (Security and Exchange Commission) and ask to file for an IPO. Then you get even more money than you’ve ever had before, and the chance to make even more art.
But you’re not just responsible to your parents any more — now you have complete strangers who can call you up and tell you that they’re not happy with your profits lately, or that you’re using too much blue in your paintings. It’s a scary proposition, isn’t it?
But it can be even scarier for an investor. Would you want a company that you own stock in to risk your funds by buying out a competitor or parallel niche company to expand their horizons? Would you risk your hard-earned cash, or maybe even your retirement, on an IPO that could make you a lot of money?* Or would you rather go with something a little more reliable and known?
For a little more in-depth look at IPOs, check out this great article by Lise Buyer
The IPO market has been really slow this year (this is only the fourth one), but that’s what happens when things aren’t going so hot in the economy.
