Why are tech IPOs such a big disappointment this year? The latest IPO, Zynga, is trading down from its Friday debut (currently around $9 versus its first IPO trade at $11). It’s not just Zynga or the overall market (which is also down). Just look at almost any tech IPO this year, many are below where they first traded on the day their shares went public, including LinkedIn (now trading at $65 vs. opening at $83 on its IPO), Groupon (now at $22 vs. $28), Pandora (now at $20 vs. $10).
Part of the reason for the lackluster post-IPO performance is that the entire stock market has gone nowhere this year. But there is something more going on here with tech IPOs in particular. They are suffering from the fact that, for a variety of reasons, they were all delayed IPOs. By that I mean that tech companies are pushing off going public as long as they can. They are raising huge pre-IPO rounds privately in what Sequoia Capital’s Michael Moritz calls “the public financing of twelve years ago.” Twitter raised $800 million just three months ago, which included the most-recently disclosed $300 million Saudi investment—that’s like doing an IPO without any of the hassles of being a public company.
While delaying these IPOs may be good for the companies, it is not great for public investors because by the time they get their hands on any shares, most of the value will already be baked into their price. If you simply compare the pre-IPO valuations of the current crop of Internet companies to earlier tech darlings like Amazon or even Google, it’s clear that most of the value is being captured by the private investors, not the public ones.
Back in the day, public investors were able to capture 99 percent of the “terminal value” of companies like Amazon, Cisco, or Microsoft (see slide above from William Quigley, which Bullpen Capital‘s Duncan Davidson used in a recent talk at TechCrunch Tokyo—also watch my video interview with Davidson). But now so much of the terminal value is captured before the IPO. Facebook is already worth $70 billion to $80 billion, and will be lucky to get a $100 billion valuation when it IPOs.
The flip side to sky-high pre-IPO valuations is that there will be less upside for post-IPO investors (i.e., the general public). And in some cases, even investors in some of these late mega-rounds won’t see a return at the IPO. Investors in Zynga’s last private round—including Kleiner Perkins, T. Rowe Price, Morgan Stanley, and Fidelity—paid $14 a share. They are all still under water (albeit Kleiner has shares from earlier rounds as well, which are worth a considerable amount).
Personally, I think most of these are good companies that may very well grow into their valuations and beyond. If they execute, there is no question some of these stocks could double or better over the next few years. I am not saying these are bad investments. But will any of the current crop of Internet IPOs (including Facebook when it comes out) produce a 10,000 percent return post-IPO like Amazon did? Those days are over.
Zynga was founded in July 2007 by Mark Pincus and is named for his late American Bulldog, Zinga. Loyal and spirited, Zinga’s name is a nod to a legendary African warrior queen. The early supporting founding team included Eric Schiermeyer, Michael Luxton, Justin Waldron, Kyle Stewart, Scott Dale, John Doerr, Steve Schoettler, Kevin Hagan, and Andrew Trader. Zynga’s mission is connecting the world through games. Everyday millions of people interact with their friends and express their unique personalities through our...
With over 100 million users representing over 200 countries around the world, LinkedIn is a fast-growing professional networking site that allows members to create business contacts, search for jobs, and find potential clients. Individuals have the ability to create their own professional profile that can be viewed by others in their network, and also view the profiles of their own contacts. Competitors to LinkedIn include sites such as XING, Doostang and Ecademy. Of note, LinkedIn won...
Groupon features a daily deal on the best stuff to do, see, eat, and buy in more than 565 cities around the world. By promising businesses a minimum number of customers, Groupon can offer deals that aren’t available elsewhere. Groupon brings buyers and sellers together in a fun and collaborative way that offers the consumer an unbeatable deal, and businesses a large number of new customers. To date, it has saved consumers more than $300 million and claims it...
Pandora Radio is an internet radio service, recommendation service, and the custodian of the Music Genome Project. Users enter a song or artist that they enjoy, and the service responds by playing selections that are musically similar. Users provide feedback on approval or disapproval of individual songs, which Pandora takes into account for future selections. While listening, users are offered the ability to buy the songs or albums at various online retailers. As part of the Music Genome Project, over...
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