Exactly what you’d expect — the round size, price, or both are cut.
It is a bummer. But — it has happened to some very good companies. Like Google:
An IPO that is done (x) electively (i.e., the company does not need money now) and (y) in a strong, receptive market is always oversubscribed. Because the investment banks engineer it that way. They engineer the “pop” and a “book” that is 10x+ oversubscribe. The offer fewer shares, at a lower price, than the market wants. And then magically … it’s oversubscribed.
But when there just isn’t enough demand — like Google in 2004, when the Internet wasn’t nearly so hot — and you push through an IPO anyway, the price and size have to get cut.
Even Facebook probably was undersubscribed in reality, even though it priced at the high end of the range. It quickly dropped.
Somewhat less understood is that IPO markets are thin. There are not that many buyers out there for the vast majority of IPOs, especially of non-name brand companies. It’s work. And it’s a process to engineer. Demand is not as large overall as you’d think.