• Legendary Banker Jimmy Lee on Thinking through the IPO

    Jimmy LeeEarlier this week, at Fortune’s Brainstorm Tech conference, a trio of industry luminaries — Jimmy Lee, the vice chairman of JPMorgan Chase; Jim Breyer, CEO of Breyer Capital; and Josh Kopelman, founder of First Round Capital — talked with Fortune’s Dan Primack about the booming tech M&A market and what happens when we invariably see another downturn.

    As you might expect, each stuck to their knitting. Breyer, known for making an early bet on Facebook, raved about the number of billion-dollar-plus digital currency companies he expects to see five to ten years from now. Seed-stage investor Kopelman talked about the Series A crunch and why, if he had to start a new firm from scratch, he’d zero in on that underserved segment of the startup market.

    Lee, meanwhile, focused on IPOs, arguing that the investors and entrepreneurs in the audience should aim for opening share prices that have room to grow, even if that means leaving money on the table.

    JPMorgan has an obvious interest in shares that are priced to move: underwriters who deliver shares that rocket out of the gate are a lot more likely to secure more trading business. Still, Lee sounded like someone who has experienced his share of flops — Chegg comes to mind — in highlighting the “super asymmetrical” fallout that ensues when shares fall on opening day.

    “The typical banker on the typical IPO wants to tell management, ‘You’re handsome, you’re beautiful, you’re spectacular, your company is amazing’ … all of which may be true. [But] what happens is you can get this momentum that looks positive but can then be negative …”

    “If you price the deal too high, and the stock falls out of bed,” Lee continued, “management is unhappy, the employees are unhappy, the shareholders are unhappy…” It can also “do damage to your brand.” And “you just don’t know how long it’s going to take [to turn things around],” he warned.

    Indeed, after Facebook’s so-called “flop” of an IPO, it took the company roughly a year to regain the trust of public shareholders.

    On the flip side, said Lee, “If you price the deal too low …you can still increase the size of the deal, the price of the deal, and so on and still get the deal done . . .”

    Ultimately, he said, startups “really have to think about what [they] want at 4 pm. EST on Day One” of life as a public company and manage to that outcome.

    Paradoxically, Lee also advised entrepreneurs not to dwell on going public.

    “You can’t let the IPO define the company, define the brand, define the vision; that’s what the management team does,” said Lee, whose firm is among half a dozen lead underwriters who will be pricing Alibaba’s high-profile stock sale. “An IPO is a sale of securities. That’s all it is.”

    Photographer: Matthew Staver/Bloomberg

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