In the midst of an S&P downgrade on US debt and a neverending European debt crisis, 13 IPOs were pulled back last week. The largest amount in one week since 2000, hmmm. But luckily for tech boom 2.0 participants, the summer is a quiet, lazy kinda time anyways. Why? Well because most institutional investors, brokers, and bankers are on Vacay in the Hampton's or Martha's Vineyard. Ironically, one semi-big name that did IPO last week was Carbonite, a company that backs up software in data in the case of a computer emergency. But even Carbonite lowered its IPO raise from $100 million to $66, and went from a target price of $15-16/share to $10-11/share.
For Mark Pincus (above) and Andrew Mason's (of Groupon) sake, let's hope this price haircut was a result of the standard summer downtime and NOT the financial recession the US is headed into. And seeing how Merkel and Sarkozy had nothing productive to say in today's conference, the economic downward spiral will continue for at least another couple weeks. But, the fact that there's been an IPO price haircut with some companies already might be a good thing for start-up mammoths like Zynga, Groupon, and LivingSocial. LinkedIn's massively mispriced IPO went up over 100% on opening day in May, and it's still being traded at 1,000 x earnings. Remember, we can't blame the underwriters (Morgan Stanley and BofA) too much here because this was the first "social media" stock to go public, who knew the demand it would bring. Also keep in mind, that institutional investors such as MS or BofA will not misprice LinkedIn's IPO on purpose because that prevents them from being underwriters for future IPOs. Rather than the underwriter's fault (which it was partially) it was a result of pent-up demand by LinkedIn shareholders who only floated a measly 9% of their shares to the public. Low float = pent-up demand = higher share price.
The financial crisis we're currently in, may actually save the long-run livelihood of (unprofitable) companies like Groupon, LivingSocial, and Pandora. How so? Well it might lower their IPO prices to a reasonable number, say 20-25 x sales, instead of 50 plus. Zynga and Facebook are unique monsters. Zynga is a scaleable business model in that it sells virtual goods to people. But how does $90 million in profits for 2010 justify a valuation of $20 billion? It doesn't. And maybe just maybe, Pincus and his VC investors like Andreeson Horowitz just want to cash in big time with this IPO, just as Reid Hoffman did with LinkedIn. Then let the market take care of the rest. But how does a company that IPOs at $20 billion with $600 mil in revenue grow into a $30 or $40 billion dollar company? It likely won't, so when you're on top of the world with the spotlight on you, the only way to go is down. Just ask Tiger Woods.
Market volatility and financial instability in the US and in Europe could set IPO prices for these tech giants at a more realistic premium than we've seen early this summer and late spring. For Groupon's sake though, I think cashing in with the IPO might be exactly what they have in mind, after all, how long is this company going to last? Plenty of data has come out the past couple weeks showing how subscriber growth is decreasing dramatically in 2011 and the biggest hurdle for them will be how to translate Groupon users into paid subscribers. Also, how does a company with $800 mil/year in revenue and 300% revenue growth YOY suffer losses? In some ways Groupon isn't even a tech company, but a marketing one. After all, of its 9,000 employees, close to 5,000 are sales and marketing people. In a matter of months Andrew Mason went from giving the death stare to Kara Swisher at the D9 Conference to erasing the accounting metric Groupon made up in the S-1 filing, ACSOI (Adjusted Consilidated Segment Operating Income). Which excludes marketing expenses and stock compensation among other things. Competition and severe losses (or lack of profitability) will lead to Groupon's demise.
As the summer months wind down and the bankers return from their lovely summer estates, their trophy wives, and kids who'll get shipped up to Exeter Academy, the IPO market WILL get hot again, particularly for the big tech companies still waiting in the wings. Talk of a bubble has stymied and having this mini-crisis with the US debt and the European debt, may prevent any chance of their being a bubble, or at the least bit delay the bubble burst. An IPO price haircut for Zynga, Groupon, and Facebook will be the best thing for these companies in the long-run. Not so much for Zuckerburg, Accel Partners, and all the other big dog VC investors. But, if Facebook IPOs at a $100 billion valuation, how is it supposed to grow into $150 or $200? Let's recall it took Apple 20 years to go from a $10 bil market cap to a $50 bil one. Facebook is a tremendous company but it will need to diversify in a big way to get any bigger.
