The Rocket Science of IPOs: Hype Is Not Fuel, It's Baggage

What to expect, and what to avoid, when considering IPOs.

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In all, the odds are steep against finding the next IPO like these all-time greats. Still, there are ways to find ones with growth potential. Privco's Hamadeh has a checklist of five factors for judging the perfect IPO:

1. Clear backing from venture capitalists with a record of success.

2. Chief executive or chief financial officer with a record of running a major company.

3. A recurring, predictable business model.

4. Breakeven earnings or positive cash flow.

5. Valuation of about $200 million.

Lots of companies have some or all of those attributes. Facebook had one through four covered. In fact, Hamadeh compares it to a dream home. "It's like the dream home you really want and it is just too much money," he says. "The valuation was a killer."

[Watch the social media sector with this ETF.]

The difference between Facebook and its big-name predecessors is related to the last point. Unlike Apple and Cisco, Facebook had grown relatively pricey early on as its shares were actively traded in pre-IPO secondary markets. At times, its pre-IPO valuation was higher than its post-IPO price. In contrast, Cisco and Apple were known to a few Silicon Valley insiders who held their shares through the IPO and knew that there was vast untapped potential.

Corrected on 07/17/2012: A previous version of this article misstated the date of Facebook’s initial public offering.