Silver Spring’s IPO showed the right mix of art and science

Silver Spring CEO Scott Lang (in middle) gets to tell people “I told you so.”
Silver Spring CEO Scott Lang (in middle) gets to tell people “I told you so.”
Image: AP Photo/Richard Drew
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Smart power grid company Silver Spring Networks had some doubters before its IPO debuted on March 13. The company had waited a long time before going public (it filed its initial paperwork in 2011) and green tech stocks haven’t been embraced by the market. But when the IPO finally came, the stock jumped by almost 30% after its debut, showing a successful IPO is just as much about art as it is science.

The IPO market has been rife with cautionary tales lately, leading some to question the mechanisms used to price and assess demand. Some like Facebook seem overpriced and then drop in the market after going public, while others like LinkedIn jump so much that underwriters are accused of underpricing the IPO. The New York Times recently argued that Goldman Sachs severely underpriced the 1999 eToys IPO—though others argued it was overpriced given the fundamentals of eToys, which later went out of business.

Unfortunately, there is no magic formula for setting an IPO. The science—the numbers for revenue, customers and profitability—is important, helping establish an IPO’s timing and the share price range. But then comes the art, which is in the form of the IPO road show. This is when the company and its underwriters tell their story, in addition to assessing investor appetite and concerns.

Facebook did a bad job of both. During the road show, some investors expressed concerns about the company’s future growth, especially because Facebook released some negative information about its mobile advertising during that time. Instead of taking investors’ worries as a hint to be more conservative on the IPO, Facebook and its lead underwriter went the other way.

For Silver Spring, the company and its underwriters, Goldman Sachs and Credit Suisse, knew they had to explain to investors why they waited so long to go public, according to sources. But they also talked about the company’s growth prospects, including in places like South America and Asia, and other promising data, the sources said. And they made the pitch to the kinds of investors who understand Silver Spring’s niche business.

Silver Spring also wanted the stock to go up by a reasonable amount after it debuted, sources added; this “pop” has psychological value. So the pricing was relatively conservative. But after getting signs of interest from investors, Silver Spring increased the quantity of shares it would sell, albeit not by too much; and it didn’t alter the $17 price.

It remains to be seen whether Silver Spring can sustain its IPO bump. But it was trading just above $22 in its second day on the market. And an IPO that had its naysayers is now being seen as a positive sign for investors in green energy technology, and in the tech market in general.