‘The worst trade ever’?: Seven investors who sold Apple stock on IPO day—and missed out on billions

This week marks the 40^th anniversary of Apple’s initial public offering, a legendary wealth creation event that still haunts those who missed out. A single share purchased on December 12, 1980 for $22 is now worth nearly $22,000. For those who savor the make-believe of perfect foresight, it is the ultimate woulda-coulda-shoulda fantasy. For early investors who sold their stake on IPO day, the pain is all too real.

Of course, on IPO day, Apple’s $2 trillion future was far from certain.

A dose of time travel is required to extract context from the company’s 1980 stock offering prospectus. Apple viewed Radio Shack’s TRS-80 computer as a key competitor, particularly given Radio Shack’s footprint of over 5,000 retail stores versus Apple’s sales channel of 750 independent retailers. Apple expected intense competition from IBM, Xerox, HP, and now defunct Wang Laboratories.

Still, there were plenty of investors eager to get in on the action. On IPO day Apple raised almost $100 million by selling about 8% of its stock to the public, most of which was used to repay short-term debt and raise working capital. That itself is a hallmark of a bygone era. Today, modern capitalists issue debt, not repay it. Repaying debt has no contemporary resonance until one is reminded that the prime interest rate on Apple’s IPO date was a whopping 20%. Paying off the bank was then a key step for growth companies.

Market commentators described Apple’s first trading day as “orderly,” with a respectable gain of 30%. Many investors were eager to own a slice of Apple and participate in the burgeoning personal computer space. Yet the sector still had its doubters. The stock was unavailable in Illinois and Wisconsin, and in Massachusetts it was banned outright. “We feel it’s over-valued,” said the Massachusetts regulator, citing a state law that IPO stock prices cannot exceed 25 times earnings per share. Apple’s EPS was almost 100.

Steve Jobs harbored no such doubts. The now iconic founder owned 15% of the company; when the closing bell rang, his 7.5 million shares were worth over $200 million. No Apple executive or employee sold shares on IPO day, bound by an agreement with the underwriter to wait before selling.

But there were sellers: Seven early private investors sold shares on IPO day. Really? Sell Apple at the IPO? When I mentioned this fact to a friend and industry colleague, he was baffled by this decision. He suggested it was possibly the worst trade ever. Who in their right mind would sell the legend?

Since every 100-share lot sold on IPO day is a forgone $2.2 million, would they now beg for a mulligan? I set out to ask all seven.

“We had no concept of a personal computer market”

The largest-selling shareholder was the venture arm of Continental Illinois Bank in Chicago, where a young associate named Paul Wood was assigned the due diligence.

Wood, who is now retired, told me he remembers visiting Jobs and Steve Wozniak at a drab back-corner booth at CES, back in the days when the well-known trade show had a summer edition in Chicago as well as its annual presence in Las Vegas. Jobs was wearing a goofy plaid suit and Wozniak wore bib overalls. Wood was no early fan of the deal, but as he performed the background checks with customers and suppliers a different picture began to emerge.

“We were convinced this was going to be an educational play—computers in schools. We had no concept of a personal computer market,” recalled Wood. He had the Apple business plan and started to haircut every assumption he could find, but his more conservative calculations still projected Apple growing like wildfire. Continental Illinois invested $504,000 in August 1978. On IPO day that stake was worth $40 million. The firm sold $5 million of the position at the IPO to get back 10 times its original investment and still held 1.5 million shares of house money. Wood, who went on to co-found private equity firm Madison Dearborn Partners, had no regrets when Continental Illinois trimmed the position and locked in gains to contribute to the bank’s overall earnings. Its original stake was a 78-bagger in 28 months. It would take 30 years before an Apple IPO investor would see a 78-fold return.

The other six sellers all had the distinction of investing capital a year after Continental Illinois in August 1979, a short 16 months before the IPO. It was the last time Apple Computer Inc took money from outsiders. On a percentage basis, all six earned the same return.

At the time, esteemed early-stage investor Alan Patricof managed Fifty-Third Street Ventures. The firm originally invested $315,000, which on Apple IPO day was worth just over $5 million. Patricof, who went on to co-found Apax Partners and Greycroft, told me that he believed in the company’s future, but to sell and get almost a million dollars on the IPO day was an unmissable chance to “get the bait back.” It certainly was no minnow; distributing the Apple shares in-kind to his investors delivered 17 times the original investment.

To this day, Patricof sometimes wonders if any of his investors mistakenly left an original Apple stock certificate untouched, hiding in a sock drawer. Never one to look backward, the still-active Patricof just launched a new firm to invest in opportunities related to the aging of the population.

With Patricof’s help, I traced the family tree connecting many of Apple’s pre-IPO investors back to a name with deep roots in American industry: Rockefeller. According to Patricof, it was the imprimatur of the Rockefeller family’s venture arm, Venrock Associates, that was a deciding factor for early Apple investors. The storied venture firm had taken an early position in 1978, with a board seat and a $500,000 investment worth $83 million on IPO day. Continental Illinois’s Wood said the involvement of Venrock and Don Valentine from Sequoia Capital was the seal of approval. Neither Venrock nor Sequoia sold on IPO day, and Sequoia has since grown to dominate the venture landscape.

Another notable investment came from the venture division of Xerox, whose $1 million check has become something of a cautionary tale in Silicon Valley. As is now well known, Jobs was subsequently offered a tour of Xerox’s Palo Alto Advance Research Center, PARC—the company’s skunkworks for cutting-edge technology like laser printers and Ethernet. Jobs and his band of engineers saw demonstrations of the computer mouse and graphic user interfaces. Did Jobs walk out of PARC with ideas spinning in his head? The miraculous appearance after the PARC tour of the Apple mouse and the Mac’s user-friendly point & click icon commands have contributed to conspiracy theories ever since. On IPO day, Xerox sold enough to earn a double on their investment and still own 1.3% of the company.

I continued to track down the original seven investor groups—or their colleagues, as several obituaries blocked my path. Not surprisingly, not one of the seven asked for a do-over. Many went on to replicate their Apple success and become huge stars in the venture capital community. As professional investors, they did exactly what they were supposed to do: risk-managing a portfolio requires trimming positions, assessing risks, and repeating it. Far from being the worst trade, they all made huge multiples on their investments. It took decades for new Apple stock owners to earn what these private investors did in just months.

I had put to rest the notion of selling Apple as the “worst trade ever,” but I still wanted to understand why the thought of dumping Apple at the IPO is met with such visceral, vicarious regret. As I dug deeper, the answer came.

The fallacy of Apple’s inevitability

Consider the context of the year 1980, when Apple was a start-up company trying to invent a category with huge competitors breathing down its neck. Selling a little Apple on IPO day didn’t mean you missed out, these investors tell me; a decent alternative then was to take the cash and buy a 3-month CD earning 16%. We reflexively feel that selling Apple was misguided only because our memory has us believe the Apple product hit parade was inevitable—or that its chart-busting stock performance started at the very beginning and never stopped coming.

That is a false narrative. Erased from memory is the pitiful stock action for most of the 1990s, not to mention the two CEOs sandwiched after John Sculley and before the Jobs homecoming, during which Apple traded near a split-adjusted 10 cents a share. We forget that the iPhone only launched in 2007, and the iPad came to market in 2010. A staggering 80% of Apple’s market valuation has been created in just the past seven years.

The power of the Apple myth is that it takes the magnificent now and pushes it back to the beginning, cleverly anchoring the success 40 years ago. We are conditioned to believe Apple’s achievement was eternal and obvious to all, even to investors in 1980. That is why we react with surprise when we learn of sellers on IPO day.

As creation stories go, there is none better than Apple’s. An apple was present at the creation. A college dropout who became a successful entrepreneur in a garage, was fired and rehired, led product innovation beloved by billions, and was taken by disease before his time. It is storytelling at its finest, and better because it’s true. The legend of Apple became our reality because we could touch it, hold it, use it, and rely on it for everything. Every click on a Mac, tune on an iPod, FaceTime call, or swipe on an iPad brought the silicon gods to earth.

If the Apple creation story is a real-life fairy tale, Apple stock is the colossal golden goose. It’s the largest stock in the S&P 500, the largest index tracking over $11 trillion of assets, and its market capitalization is seven times the size of the world’s largest ETF, ticker SPY. Legendary investor Warren Buffett, though not an Apple shareholder until 2014, owns nearly 1 billion shares. From 2018 to 2020, Apple’s market value leapt more than $1 trillion. Anyone with a 401(k) or retirement plan with exposure to U.S. equities likely owns a sliver.

On this 40th anniversary, many will play the wealth parlor game: “If I bought Apple stock back in . . . .” For some, it is not a game. Many investors have owned the stock for years and it has contributed powerfully to their savings. For a few investors, including the ones I spoke to, owning enough and owning it early was life-changing. Apple possesses the magic to create fortunes. No need to rub Aladdin’s lamp when you can swipe it.

There is perhaps no better example of the Apple myth than when Forrest Gump opens a letter from Apple thanking him for his early investment. As Forrest tells the lady on a bus bench in the 1994 movie, Lieutenant Dan took his shrimp boat profits and invested them in “some kinda fruit company.” Forrest didn’t “need to worry about money no more.”

Leave it to Hollywood to embrace the Apple fairy tale in 1994—three years before Jobs’s return as CEO and 13 years before the first of two billion iPhones. Hollywood understood the legend long before we did. Better yet, they pushed the creation date earlier. Freeze-frame the movie to reveal the letter is dated 1975—before there was an Apple Computer and when Jobs was still at Atari, three years out of high school. Only Apple could have a pre-creation myth. That makes Forrest the original investor. He wins the woulda-coulda-shoulda game.

Tim Galbraith is the founder and chief investment officer of fintech startup Innovation Beta.