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Roula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.
I have a confession to make. Before I send anything off for publication, I usually run it past someone in my trusted circle, such as a family member, friend, or former colleague. Thousands of people will parse my words, and so I like to test the waters before subjecting myself to the unsparing scrutiny of the FT Alphaville editors or readership.
IPOs go through a similar process. In the US, companies looking to go public can gauge institutional investor interest before formally launching an offering. This “testing the waters” (TTW) process is designed to give investors time to familiarise themselves with the company and provide feedback to the management and underwriters.
TTW was introduced in the US by the JOBS Act of 2012, permitting “emerging growth companies” to privately engage with qualified institutional buyers before or after filing a registration statement. In 2019, the SEC extended this flexibility to all issuers. In theory, TTW reduce the risk of the kind of faceplant that happens when a company and its underwriters market an IPO with an unrealistically high price range or overambitious size.
But theory and practice often part ways. The initial public offering of AI infrastructure firm CoreWeave, initially targeting a $2.7bn raise at $47-55 per share, was slashed to $1.5bn at $40 per share. Even then, the deal barely limped across the finish line, thanks to a last-minute $250mn “anchor” order from Nvidia. The offering reportedly ended up with just three investors holding 50 per cent of the stock, and it seems to have required some stabilisation from lead bank Morgan Stanley to avoid a first-day drop. Hardly a textbook success.
CoreWeave isn’t an isolated case. Earlier this year, the IPO of LNG exporter Venture Global was similarly downsized and downpriced, only for the shares to plunge in the after-market. If the TTW process is supposed to prevent such misfires, what’s going wrong?
It’s not as if investors were hard to reach. CoreWeave, with its AI narrative and blue-chip backers, was a high-profile float. Every institutional investor would have wanted a meeting. Nor were the company’s red flags hidden. Investors on the TTW circuit presumably knew all about the massive debt pile, cash burn, extreme customer concentration, and eyebrow-raising ebitda adjustments.
The original price range and deal size now seem like wildly wishful thinking. While market conditions had softened, the magnitude of the “miss” points to deeper failures. Either investor feedback was a lot weaker than bankers initially led management to believe, or management was unwilling to accept reality — or, more likely, both. Eager to win the mandate, investment banks may have pitched an overly aggressive valuation and then struggled to dial it back once investor feedback came in far lower. And once committed to an optimistic price range, management may have refused to adjust expectations, holding the banks to their own rosy pitch numbers.
It feels like a classic case of “pitch now, adjust never” — everyone gets stuck defending numbers that were never realistic to begin with. As a result, the IPO lacked momentum from the start.
The messaging around order-book coverage only made matters worse. Syndicate banks claimed the IPO was fully subscribed on day one, citing “early mutual fund support and one-on conversions,” and later reported that the book was several times covered. But investors saw through the spin, recognising that much of the demand likely came from hedge funds inflating their orders — standard practice to secure a better allocation if the deal gains traction. Most fund managers know better than to put much stock (pun intended) in such coverage claims. After all, SailPoint’s IPO was supposedly 20 times covered, and yet it still dropped in the after-market.
Another issue involved the Nvidia $250mn anchor order. Typically, anchor investors publicly commit early to signal confidence. Nvidia’s last-minute move suggested an emergency patch rather than a strategic endorsement. Given Nvidia’s multiple roles with CoreWeave — shareholder, supplier, customer — its involvement was always going to be viewed as complicated. The belated timing only reinforced concerns.
With weak demand and a last-minute bailout, only a true believer would have asked for a sizeable allocation of stock, and so it’s no surprise that CoreWeave’s IPO ended up with a highly concentrated order book. According to Bloomberg, half of the shares were allocated to just three investors.
The tight distribution may have prevented aggressive day-one selling, but it stores up a new problem. A successful IPO benefits from a broad base of investors willing to trade the stock in the open market. Without marginal buyers, the stock struggles to find natural demand and tends to grind down over time. CoreWeave will need to outperform financial expectations or hope for a return of AI frenzy in order to attract new buyers.
And the company has its work cut out for it. Unfortunately, investor sentiment was overwhelmingly negative towards the IPO. A poll by RBC Capital Markets — who had no role in the float — found that the vast majority of investors saw no real competitive moat in CoreWeave’s business model. With hindsight, a lower range and smaller size might have created a better platform for CoreWeave’s debut as a public company.
CoreWeave’s IPO didn’t struggle because of bad luck. Every investor I speak with has huge appetite for new listings. The problems began with inflated expectations — likely fuelled by bankers eager to win the mandate and management reluctant to adjust. The TTW process failed to translate into realistic deal terms. Oversubscription claims rang hollow. The Nvidia infusion smacked of desperation. And the concentrated allocation leaves the stock vulnerable.
The broader lesson is that fund managers are wise to the old IPO playbook. Unless banks reform their modus operandi, CoreWeave and Venture Global won’t be outliers but harbingers of more high-profile misfires.
One final note: I didn’t show a draft of this piece to anyone before submitting it. If you think I’m off base, you’re proving my point about testing the waters.
