21. June 2012–
The future of the tech company IPO isn't looking good, at least not with Facebook, Groupon and Zynga as representative examples. But it's an exit model well worth fixing, a topic that took centre stage in yesterday's "money" session at LeWeb London.
The trend: explosive valuations in pre-IPO funding deals (with some investors coming on board relatively late) followed by a slump once companies actually list. The likely result: reduced confidence in the model, fewer IPOs and more trade sales (not a good outcome for innovators and the general public - here's the Economist's take on why).
Zynga (NASDAQ: ZNGA), for example, raised $490 million at a $10 billion valuation in February 2011 before listing on the NASDAQ in December at $10 per share. Today, Zynga shares sit around $6 - a price valuing the company at not much over $4 billion.
Yes, shares are by nature volatile and slumped prices may recover with time. Facebook (NASDAQ:FB)'s shares are currently on the rise, today priced $31.60 (compared to $38 on day one). Late-stage investors may still make slight profits despite poorly performing shares (Andreessen Horowitz on Zynga, for example). But, overall, the big tech listings over the last year don't exactly inspire confidence for those looking to list.
Kill the hype, build sustainable businesses
So what to do? Jeff Clavier is a partner at SoftTech VC, an investor in Groupon (NASDAQ: GRPN), Fab, Facebook and Twitter among others. He implied that bringing valuations back to earth would be a good place to start, though there's a balance to be struck with making sure companies still can achieve good outcomes from a funding round. "It's a wake up call to the entire food chain that the sky is not the limit," he said. "Whatever price your company is at, whether it's early-stage, Series A, later... it has to be sustainable."
One possible factor in the fever-pitch valuations seen recently: big players such as Facebook are waiting too long to list. "We're definitely seeing companies staying private longer so you're seeing higher valuations as a result," CODE Advisors partner Michael Marquez agreed.
The Milner "ripple effect"
Another possible reason, according to Index Ventures partner Danny Rimer: "The folks at DST [Global - led by Russian billionaire Yuri Milner] when they entered the market, they transformed the market in venture capital, which was a cottage industry, into an asset class." Last year, for example, Milner put money ($150,000, alongside angel investor Ron Conway) into each of the 43 firms incubated by Y Combinator. While it's hard to argue with the success of this type of approach, at least for Milner, it's had what Rimer called a "rippling effect" by making the industry as a whole less "sensitive" to valuations.
Rimer (and others) were quick to add that great companies still deserve great valuations. While Index Ventures portfolio companies Viagogo, Etsy and Sonos are receiving "nosebleed" valuations compared to what they might have received at another time, "they're pretty justified given the incredible strength of those businesses", he said. "There are transformational businesses being built very, very quickly."
All investors on the panel - Clavier, Marquez, Rimer and Balderton Capital partner Roberto Bonanzinga (Balderton are investors in Berlin gaming company Wooga) - stressed the importance of building sustainable businesses rather than just making a dash for fast growth. LinkedIn (NYSE: LNKD) won a mention here from moderator Jonathan Goodwin (Lepe Partners) as a company that's managing to "gradually grow into its valuation".
There were few concrete recommendations from yesterday's panel that investors and founders can act on - but, hey, identifying a problem is the first step to solving it. Next stop, building a solid market for tech IPOs in Europe rather than the US...