First Stage Investor

Addressing Questions About Digital Brands Group’s IPO

Addressing Questions About Digital Brands Group’s IPO

Digital Brands Group (DBG) had its initial public offering (IPO) recently. And it generated some confusion and many questions from our members. So I’m taking the opportunity today to address some of the issues you’ve raised.

To refresh your memory, DBG’s IPO incorporated a “reverse stock split” of 15.625 to 1. Most First Stage Investor members paid around $0.50 for their shares. Your effective paid price is $7.8125 (15.625 multiplied by $0.50), which comes to $7.8125. DBG’s IPO share price was $5.00. 

That means that First Stage Investor members paid more than the IPO price, which rightfully struck many of you as odd. Many of you noted that an IPO is supposed to be a good thing — a chance to cash out profits, not take losses. 

Many of your questions revolved/centered around this issue. What happened with DBG’s IPO? Is it the exception or the rule? What should I do now?

All good questions. Let me answer them one at a time.

What happened with DBG’s IPO? I was not in the room when DBG decided that this was a good time to enlist on the Nasdaq Capital Market (NasdaqCM), which is Nasdaq’s tier for companies that need to raise capital post-IPO. But it seems that DBG felt that it would have better access to capital as a publicly listed company than as a private one. With that decision made, a reverse stock split was inevitable. The NasdaqCM requires a share bid price of at least $4 (with certain exceptions). 

Is a “down” IPO the exception or the rule? For early-stage investors, it’s highly unusual to see a “down” IPO because early-stage share prices are often very low compared to late-stage raises or the IPO price. Most of the time, early investors do extremely well when a startup goes public. So this is highly unusual.

For late stage investors, especially those who invest in the final rounds leading up to the IPO, down rounds happen more often than you think. And the reasons for down rounds vary. Perhaps growth slowed. Or market conditions took a turn for the worse. Or the pre-IPO price was greatly inflated. 

Most startups go through multiple raises to reach an IPO. DBG took a different and rather uncommon path. It doesn’t mean what it did was right or wrong — just different. 

What should I do now? That’s the question I cannot answer for you. I’ve often said how illiquid shares are a blessing in disguise. Startup shares can go up or down. But startup shareholders never sell low because they can’t. They’re prevented from selling illiquid shares. And so they never regret it when shares rebound later on and reach new heights. Just because you can sell DBG shares now doesn’t mean you have to

Just one more quick note I want to add here. It’s not for me to either defend or oppose DBG’s decision. But we can assume DBG made this decision because it believed it was the best way for the company to continue growing while maintaining a high degree of capital efficiency. Investors who agree with the company’s reasoning can simply hold on to their shares… and wait for shares to rise as this strategy bears fruit. 

But whether you agree with DBG or not, there’s an argument to be made that it had the long-term interest of investors in mind. Which brings us full circle. It’s not how we usually think of IPOs. They’re often framed as the moment for near-instant gratification — a chance for early investors to cash in on big profits. So the disappointment surrounding this IPO is understandable. 

One of the risks DBG took by going public with a “down” round was alienating current investors in an attempt to maximize future growth. 

I would suggest you put your disappointment to the side and make as dispassionate a decision as you can on whether to hold or sell (or buy, if that’s what you want).  

It’s your decision to make. I appreciate all the feedback. Keep it coming.

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