ExOne IPO Successful: Shareholders Contribute Random Passers-by

Before I start bashing bankers, I’d like to congratulate the ExOne Company on a successful initial public offering (IPO).  I haven’t seen much about ExOne [NASDAQ:XONE] on the robotics sites, but if we’re calling Stratasys [NASDAQ:SSYS] a robotics company, we should call ExOne a robotics company as well.  It is really good to see another public company in our sector.  Hopefully, this will encourage more investment of both capital and entrepreneurial energy in our industry.

Last time I checked 26 is a lot more than 18.

Last time I checked 26 is a lot more than 18.

By the criteria of the market commentators, the ExOne IPO was a huge success.  You can Google things like “3D printing red hot.”  The IPO was priced at the top of the range $16-18, it opened around $26 before shooting up over $33.  Almost a week later it is trading roughly at its opening price.

Now this is all fine and dandy as far as it goes, unless you were an ExOne shareholder.  Who, by the way were the ones selling in the IPO.  One shareholder sold 300,000 shares in the IPO.  This means that this one shareholder transferred a gain of $2.4M to some connections of the underwriters.  This shareholder is taking $5.4M, less fees and discounts, call it $5M from of the IPO, so $2.4 is not exactly a rounding error.  Presumably, this shareholder is also more inclined to build companies with the capital than whatever speculators are hovering over the IPO.  Similarly, the company lost out on $40M of capital that could be invested in projects.  Think about that.  The company is worth less than $350M and the IPO mis-pricing cost it $40M of cash.  Cash!  Cash that could be sitting on the balance sheet scaring off competition and waiting for the next expansion opportunity.

It is hard to explain an IPO price that is so far below the fair market value of the company.  I know that there are a lot reasons why bankers try to justify under pricing an IPO, but giving-up over 10% of the firm’s market value in a single transaction seems really hard to justify no matter what.  I’m not sure what part of the economic gains from listing publicly should be given to financial intermediaries and incoming investors to get a deal done, but over 10% of the company seems quite excessive.  These new shareholders have no restrictions on ownership and quite likely to flip their shares instead of taking an active roll in growing the company, which seems to further erode any claim they might have to extraordinary gains.

I’m not familiar with the track records of FBR, BB&T, and Stephens, the underwriters for the ExOne IPO, but I’d think twice or three times about hiring them if I was going to do an IPO.  They seem to have not only underpriced the IPO, but also floated too much of the company, almost 40%.  Underpricing the IPO might be tolerable if the bankers had only floated 5-10% of the company.  The company could have done a secondary offering later once the offering had an established market price, instead of getting ripped off during the IPO.  The large offering certainly did do one good thing for the bankers: it increased the underwriting fee.

If my company ever goes public, I hope I’ll have the good sense to hire Morgan Stanley–unless an underwriter is involved in litigation for overpricing an IPO, how can you be sure they’re any good?  Heck, they even give discounts–what’s not to like!

Robohub: What funding scheme is most conducive to creating a robotics industry?

money robotRobohub just posted a great series on optimal funding schemes for robotics start-ups.  I highly recommend reading it.  I believe that it probably represents the best collective wisdom in our industry.  Frank Tobe probably has the most informative response for someone actually looking to raise money: robotics is still at the point where you need to appeal to individual personalities who see it and get it, or find a government customer.  However, I thought that all the authors raised thought provoking points.  Here are the follow-up questions that I posed:

Rafello D’Andrea:  What structural and cultural changes need to be made to robotics departments so that they become as entrepreneurial as computer science or biochemistry departments?

My own observation is that here at CMU–one of the most prolific robotics start-up hot beds–that robotics is pretty theoretical and academic compared with other engineer disciplines, particularly other disciplines in the computer science school.  The revolving door between industry and academia just doesn’t happen in robotics the way it does in other disciplines.  How do we get industry thinking into robotics departments?  After staying close to the university for 40 years, it is going to be hard to change the culture of the robotics departments, however I think that universities that succeed have a chance to maintain or overtake the currently established leaders in the field.

Henrik Christensen:  If much of the benefits from robotics R&D accrues to parties who didn’t do the research—whether competitors or society at large, economics tells us that subsidies are not only appropriate, but necessary, to get to the socially optimal level of investment. What portion of the gains from commercial robotics R&D is controlled by the company that does the research?  How does this compare with other industries?

I know the Georgia political climate is such that private industry is always the answer.  We all agree on the need for more private investment, but if robotics companies have trouble capturing the value that they create, we need to do one of two things:  1) Either subsidize their research in some rational way that creates the most social gain or 2) adjust intellectual property laws so that more of the benefit of robotics R&D accrues to companies making the investment.  Some econometric research is probably in order here… any econ Ph.D. candidates reading?

Mark Tilden:  Doesn’t your suggestion of investing in crowd funded start-ups point at the opposite of needing more innovative roboticists?  If crowd funding is the shining star in our industry, wouldn’t that suggest that our roboticists are plenty innovative—as high end research is not required to make marketable stuff—but rather our entrepreneurs and business managers are behind the power curve?

Obviously, market traction is the key.  Financing is for companies is in some way just a loan to future consumers–even if the consumers don’t know it.  This question of what’s the real roadblock to creating more successful robotics start-ups is a key one.  I’ve made my belief that the robotics “parts bin” has plenty of technology in it pretty clear on this blog as well as my belief that robotics has a shortage of qualified entrepreneurs and managers.  The problem is not on the engineering side, it is with those giving directions to engineering.

Frank Tobe:  If the individual / angels / VC route is more of the direction that we want robotics to go in, what do the special people that you point to in your response see that other investors don’t see?  Or are they doing something different?   What is the barrier to other investors who might want to do the same?

If robotics is at the point where it is being funded by visionaries, how does one go about finding, cultivating, or creating more?  Are the visionaries right or is their compass off?  I don’t have good answers to this, but I do think that robotics seems to require a more comprehensive understanding of engineering, current business practices, and what the future should be than most other industries do.  That said, one would expect that there are extraordinary rewards for solving these hard problems, unless some of the basic economic problems that I want to suggest in my question to Henrik Christensen exist.

Nicola Tomatis:  Software and biotech companies aren’t cheap to build in absolute sense either, but they are called capital efficient by investors.  Financially, robotics is probably more like software and biotech than it is like retail or [green] energy businesses—which really require a lot of money.   Is there data that supports the position that robotics is expensive compared to other capital efficient industries?

The part of this blog I’m most proud of is gathering the evidence to show, to a practitioner’s standard, that robotics companies are as  capital efficient as software companies, conditional on success for both.   While plenty of robotics companies waste investors money, I’m not sure that this that different from any other IP intensive industry.  However, whenever a software company fails we blame management or the market–but when a robotics company fails we blame the underlying technology.  We need to stop that.  It makes it harder for the next guy to start a robotics company–the underlying technology is there–we just haven’t made many companies with it yet.

It is not a secret any more…

This is what I’ve been working on that’s been keeping me away from the blog:

 

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