OpenTable IPO Shows That Dumb Cash Is Starting To Look For New Investment Vehicles

from the good-or-not? dept

There's been lots of buzz in Silicon Valley thanks to OpenTable having a 1999-style IPO, where the stock popped 70% on the first day (which, means that OpenTable effectively left a huge chunk of change on the table). But, of course, many people are asking if this finally means that IPOs can come back in fashion for venture-backed startups. Just a few weeks ago, we discussed how some believed that tech IPOs were primed to come back, though I was (and still am) skeptical. As the first link above shows, looking at OpenTable's financials makes you wonder how anyone would invest at the dollar value it hit. It makes little sense. So, this could just be an anomaly, as investors who have been sitting on cash for too long and are desperate to find different places to dump it got excited about a "new" tech IPO. But, unless the companies going public have better fundamentals, it seems like they'll start finding better places to put their cash. Instead, this seems like those sitting on too much cash venting a little steam just because.

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Will Tech IPOs Come Back Soon?

from the theories... dept

Venture capitalist Fred Wilson has laid out his reasons for why he believes the IPO market is about to come back. It's a worthwhile read if you're interested in the startup ecosystem. While I tend to agree with Fred on many different things, on this one I'm not at all convinced. I do agree that there are a growing number of companies who in the past would have gone public about now, but are held back by the near total lack of willingness to risk running the IPO gauntlet. The one thing that we agree on is that investors are going to start looking to put money into new investments sometime soon (there's way too much money being flooded into the market, and it needs to go somewhere). I'm just not convinced it will go into the traditional IPO market. I think it would be good if the IPO market opened up somewhat, but a flood wouldn't be good. It would create another bubble scenario. My guess (at this point) is that the money will go into something unexpected -- perhaps even new financial instruments. However, I'm curious: where do people think all the money that's being dumped into the economy will flow? What's the next bubble going to be?

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Facebook Won't Be Rushed Into Going Public Like Google

from the well,-it's-financials-are-quite-a-bit-worse... dept

Throughout 2002 and 2003 there was a ton of speculation concerning when Google would "finally" go public. Everyone knew the company was making a lot of money and growing fast, but it wasn't clear how big the company was nor how successful. The company's top execs insisted that they did not want to go public and tried to avoid any discussion of it. However, in early 2004, the company tripped a specific level that required them to start reporting their earnings publicly. If you have over 500 shareholders, even as a private company, you are required to file earnings reports, just as if you were a public company -- and at that point, Google execs realized there was no additional benefit in remaining private. So that single event pushed Google to finally IPO, and some were beginning to wonder if the same might push Facebook into an oncoming IPO.

It looks like that won't be happening.

Facebook's lawyers requested and received a special exemption from the SEC, allowing the company to not report its earnings publicly, even if it goes over 500 shareholders (which is likely to happen relatively soon). The exemption will remain in place until the company decides to go public or is acquired. You have to think that some folks at Google are kicking themselves for not trying to do the same thing. Either way, it's pretty clear that Facebook doesn't have the financial numbers that Google had at the time it went public, either -- so forcing Facebook to go public at this time probably would have made a lot less sense than it did for Google, who had fantastic earnings.

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Finding The Last Sucker To Invest

from the how-the-game-is-played dept

Valleywag points us to a rather scathing profile of late stage "investment" firm Advanced Equities in Chicago. Valleywag refers to the operation as a venture capital firm, but the details suggest it's a bit different than a traditional VC firm, which tends to raise a fund and then invest it as deals come up. Instead, it looks like AE is more of an investment hunter. While it does appear to have some money under management, it sounds like other VCs come to AE to go out and find investors to invest in the latest round. Tellingly, rather than referring to these investors as "limited partners" like a regular VC firm, AE refers to them as "customers." And, from the Forbes story, it sounds like those "customers" are basically unsophisticated investors who don't recognize what they're getting into.

Rather than billionaires, say former AE brokers, many clients are doctors, lawyers and dentists who lack the sophistication of typical institutions and ultrarich VC investors.

As an example, they cite one such case:

In 1999 AE sold Constance Kamberos, now 82, $330,000 worth of "bridge" notes issued by Hymarc, a firm it backed. Kamberos says the notes were pitched as a relatively safe way to earn a 12% yield. When she didn't get paid by Hymarc, Kamberos visited AE in Chicago's Loop. After she had a heated exchange with Daubenspeck, AE had the cops haul her away, Kamberos says (AE says she visited repeatedly and was hauled out by building security)

These aren't stories you hear with a typical VC firm. These sound more like stories you hear from "boiler room" operations tricking unsophisticated investors out of their hard-earned savings. Yet, as Forbes notes, big Silicon Valley VC firms like Kleiner Perkins and NEA love to talk up AE. Hmm. Then, let's recall that the IPO market has pretty much dried up for startups lately, and you can start to put two and two together.

In the bubble years, the "business model" of certain venture backed startups, was basically to sell equity to the last sucker. In the late 90s that was the public market -- consisting of a bunch of unsophisticated retail investors who would overpay for junk. But it's harder to get access to the public markets, and at least a few of the suckers have learned at least some of the lesson. However, if you can convince those suckers that they're getting in on a special deal -- say a "late stage, pre-IPO startup backed by the biggest names in Silicon Valley" the lessons learned from the last bubble go out the window. Reading this, it would appear that AE's function is to bring those "last suckers" to these startups and their VCs without going through the painful public market IPO process.

What's not clear is whether or not the VCs (and startup founders?) are taking money off the table directly during these late stage financings -- but it wouldn't be all that surprising (such deals are increasingly common these days). And, it would explain situations like the one in the Forbes article where AE helped gather up $45 million from "customers" to invest in a company called Agami. Five months later, the company no longer existed. Even people who worked at the company had no idea what happened to the money. The Forbes piece also notes that AE often pumps up the valuation of the startups in question, meaning that an earlier stage VC could be selling its shares as part of that "investment" (i.e., the money would go straight to the earlier investors, rather than the company), allowing them to still get a positive ROI on a company about to go broke.

If the Forbes report is accurate, then it certainly sounds like VCs may have figured out a different way to find that "last sucker" it needs to cash out certain investments without having to take a company public. It doesn't necessarily sound illegal (though that may depend on the details -- and there are apparently a bunch of lawsuits floating around AE). Never underestimate the ability of early stage investors to eventually find a bigger sucker to take their bad investments off their hands.

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No VC-Backed Companies Go Public In Q2

from the first-time-in-30-years dept

It's rather surprising to find out that, for the first time in about thirty years, not a single venture-backed company went public last quarter. Even in the worst of the various downturns that have happened over the past thirty years, there were always at least a few venture-backed companies that were able to make it out. This news has some folks fretting about what it means for the VC community -- with many pointing out that a bunch of VCs have moved away from "quick flip" internet investments into more long-term alternative energy bets.

I'd also guess that Sarbanes-Oxley has a lot to do with this. Going public is a lot less appealing these days thanks to the expenses required under that law. Rather than "cleaning up" the market, it's basically made going public a toxic process, so that everyone stays private and looks for acquisition opportunities. That said, it was obvious during the boom years that companies were going public way too quickly -- and being a public company is no picnic, with the required short-term thinking it demands.

So, what happens instead? There's been some talk of creating some sort of middle road. Rather than taking companies fully public, or selling them off to big players, what about a limited market of private equity investors who would let some of the original VCs and founders cash out, while keeping the company away from public market reporting requirements? This could potentially make a lot more sense for all involved. It basically adds another layer between VCs and the public markets where the private equity guys could either eventually take the company public or sell it off themselves. Even if this doesn't really work out, one thing is pretty clear: VCs will find a way to get money out of investing in startups, even if it's not in taking companies public.

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Naveen Jain's Latest Quest For A Trillion Dollar Company May Be In Trouble

from the how-about-that? dept

Naveen Jain is nothing if not confident in himself. Back in 2000, as founder and CEO of InfoSpace, he famously declared both that InfoSpace was bigger than the internet, and that it would be the world's first trillion dollar company. More specifically, he said: "There are two kinds of people in this world... those who don't believe in God, and those who believe in God and InfoSpace. That's OK -- the nonbelievers will be converted when we become a trillion-dollar company." Now, it's one thing to be confident, but it's another thing to be cooking the books to try to get there. After InfoSpace imploded and Jain was sent packing, an investigative report uncovered all sorts of evidence about how much of InfoSpace's revenue was a huge scam, involving outright lies and "lazy susan" deals, where InfoSpace would "invest" in a company, who would turn around and pretend to buy InfoSpace services as a way to boost revenue.

Jain moved on and started a new company called Intelius, which claims to help you get background information on people -- though it's not hard to find many, many, many people who claim that the information is next to useless. Still, it's managed to bring in a ton of revenue, and with that has been planning to go public. However, Mike Arrington did a fantastic bit of sleuthing to discover that much of that revenue seems to come from a very questionable method.

Basically, Intelius gets you to cough up some money for the "information" it has on someone. Afterwards, it asks you to take a short survey, promising to give you $10 for your time. The survey is quick, but down below, in tiny gray-colored hard-to-read print, it notes that in submitting the "survey," you're actually agreeing to sign up for a $20/month "service" that, according to Arrington, doesn't appear to do anything other than charge you $20/month. As for that $10? Well, it's never mentioned again (nor is the $20/month you'll be paying... other than on your credit card bill). The "service" is a separate company (though Intelius gives them your credit card info), but clearly pays Intelius a fee for each signup. Arrington does a few back of the envelope calculations and figures that nearly all of Intelius' "growth" comes from these scammed deals, which, some claim are also difficult to cancel.

The whole thing stinks, and you would think that, given the situation with InfoSpace, the backers of Intelius' IPO would have done a bit more due diligence before agreeing to take the company public.

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Dangerous Reasons To IPO

from the desperation,-not-growth dept

There's been some indication that the IPO market is beginning to open up again, what with profitless firms like NetSuite having successful offerings. At about the same time that was happening, Danger filed to go public as well, but perhaps for all the wrong reasons. Like NetSuite, Danger is losing money. However, the story of Danger is an instructive one, and it's surprising that the firm is trying to go public. Reading between the lines, it feels like Danger is trying to go public more as a desperation play to stay in business, rather than as part of a plan for strategic growth.

Danger, of course, launched its HipTop/Sidekick device way back in 2002 to much fanfare. I bought one the first day it was available, and used it for more than three years. It really was one of the first useful mobile devices for being able to do things like web surfing. However, while the company did an amazing job in designing the device, it made a series of strategic mistakes that have since limited the company's business chances. First, it took an early investment from T-Mobile. Initially, this might sound like a good idea for a device maker looking to have its device offered by a mobile operator -- and, indeed, T-Mobile offers the Sidekick. The problem was that almost no one else wanted to go near it, as they didn't want to help out a rival operator's investment. Danger picked up a few smaller operators, but never could get the device out to a large enough audience.

The second big mistake was in closing off the device. Early on, it didn't even have a developer kit for developers. Once it did, many developers had already moved on to other things. On top of that, Danger/T-Mobile still controlled which apps were available. You couldn't go around Danger/T-Mobile to load whatever app you wanted. That also turned off developers who knew they couldn't just write an app and push for viral adoption. They had to go through the gatekeeper. It certainly made the device a lot less useful. Whereas for other popular platforms there were tons of apps available, Danger had a very limited supply.

While the company built up a modest following, in part by getting famous young celebrities to carry the device (which backfired a bit when Paris Hilton's got hacked), many other devices eclipsed Danger's devices and the company has done little to push its way back into the discussion. It basically just bet on having a really cool design and continually making minor updates to that design. That was strong enough to keep the company afloat, but it's still losing money, not growing very fast, and still incredibly reliant on T-Mobile for a huge chunk of its business. It's certainly not a particularly compelling IPO story -- and it feels like an IPO out of desperation for new capital, rather than an IPO of a company that is growing and has strategic plans in place for the use of a capital influx. Perhaps the folks at Danger saw an opening in a market that's warming up to IPOs, but it wouldn't be surprising at all to later hear that the company ends up pulling the IPO.

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Market Still Not Totally Crazy: Classmates.com IPO Shuttered

from the a-little-sanity dept

In all the talk about a "new" internet bubble, the one thing that many people have pointed out over and over again is that we're still not seeing the same sort of crazy IPOs that were everywhere in 1998 and 1999. However, that's not to say some weren't interested in trying to push the envelope. More internet firms -- including quite a few that were unprofitable -- have been looking to go public lately. However, perhaps the most outlandish was Classmates.com's IPO plans. Classmates, of course, was a survivor from the original bubble, and had something of a web 1.0 social network, helping classmates reconnect. It tried to make money on premium services that very few people signed up for -- and even fewer as things like Friendster, MySpace and Facebook came along. However, with social networking sites getting astounding valuations, United Online (the current owner of Classmates) decided to try to polish the company up and position it as a social networking IPO. Of course, it didn't take Sherlock Holmes to realize this was a dud from the very beginning -- and it seems that message finally got back to the folks at United Online who have pulled the offering costing the company $4.5 to $5.5 million for a lot of nothing. Still, this should be seen as a positive development. Even with the hype and crazy valuations around social networking, the folks on Wall Street have at least some sense of when a company just has a story rather than anything of substance.

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Alibaba Shows That Chinese Firms Can Leave IPO Money On The Table As Well As US Firms

from the not-such-a-good-thing dept

There's lots of buzz today about how China is experiencing a dot com bubble similar to what the US faced a while back, with the news of Alibaba.com's first day pop on the Hong Kong Stock Exchange. The stock nearly tripled after debuting, which is the type of thing that gets lots of press. Yet, once again, people seem to be missing out on the simple fact that this first day pop means the company left a lot of money on the table. The bankers who brought the stock out mispriced the offering by 3x apparently. Pricing certainly isn't an exact science -- and it's perfectly reasonable to slightly underprice the offering to lower some of the initial risk, but to underprice a stock so badly is not a good thing. Effectively, Alibaba could have raised 3x the amount of money they got, with no additional dilution. Instead, it raised 1/3 the money, and the other 2/3 went to Wall Street folks who flipped the stock quickly. While this does mean that Alibaba can now raise more with secondary offerings (assuming the price stays up), it still looks like the company left an awful lot of money on the table.

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Yes, We Knew Tech IPOs Were Coming, But We Didn't Expect It This Soon

from the signs-of-the-exuberance dept

Only a few days have passed since we wrote about the looming crop of IPOs on the horizon. The IPO of direct marketing software provider, Constant Contact, caused a stir as hit the street with a surprisingly warm reception. Opening the day at $16, $2 more than the initial estimates, the price rose to over $30 during the first day of trading. This despite the fact that Constant Contact is not yet profitable -- which people had been saying was necessary this time around for IPOs. Investors are clearly banking on speculative growth of its revenues, which are expected to double for 2007 versus 2006. That said, IPOs of unprofitable companies are popular cannon fodder for the many "return of the bubble" rumors that are already starting to spread, and certainly should turn up more interest both in Silicon Valley and on Wall Street for starting to explore what internet firms could potentially go public.

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IPOs Flourishing Again

from the bring-on-the-aeron-chairs dept

IPOs, for the most part, have not been the preferred exit strategy of the latest round of entrepreneurs -- most companies debuting on the market this year have been greeted with lackluster response. The tide may be beginning to change; this next quarter may see the largest crop of IPOs since 2000. With 46 VC backed companies registered to go public during the third quarter, it is obvious that the IPO market is warming up. Time to break out the Aeron chairs in celebration of yet another era of Internet hype and excess? Not quite yet. Out of the 46 companies that filed, none were Internet companies. However, if the latest crop of IPOs do well, you can bet that Internet startups will start looking towards Wall Street... and plenty of investment bankers will be waiting with open arms.

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As Companies Go Public, Power Stays Private

from the inside-out dept

As we've noted several times, the tech IPO came back in a big way this year, most recently evidenced by VMWare's meteoric launch out of the gate. While this is good news for companies and their investors, Kevin Kelleher argues that we're seeing a disturbing trend in the way these deals go down. In many instances, the terms of the deal are such that the general public shareholder has little power in the newly-public company, with most voting power concentrated in the hands of a select few insiders. What's more, in many instances, the companies have sold stakes in themselves to certain outside investors at a price below what was available to the public. It's easy to argue that such moves represent greed and a desire to keep the spoils concentrated, but there may be other reasons for these actions. As the rise of private stock exchanges suggests, public shareholders are increasingly seen as a liability, whether it's due to the threat of shareholder lawsuits or activist investors. Kelleher's concern is for the "little guy", as he puts it, but it's not clear that most investors actually care about things like voting rights. As long as investors understand where they're at, and can weigh the risks accordingly, certain trends in governance structure shouldn't be particularly worrisome.

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A Look At How Much VMware Left On The Table

from the ipo-madness dept

Back during the dot com bubble when startups with no track record were going public on a regular basis with huge first day pops in stock prices, it got many people thinking that such first day jumps were a good sign. In fact, some companies bragged about having the largest first day jump. We haven't seen much of that lately, but it may be coming back after VMware's public offering. VMware shares priced at the top of their range at $29/share, but opened this morning at a whopping $52/share. VMware, of course, was supposed to have been one of the potential hot IPOs in the class of 2004, but decided to accept a buyout offer from EMC instead. This turned out to be a great decision, as the company has grown a tremendous amount under EMC, and today's IPO is for a much more substantial VMware than we would have seen three years ago.

However, since there are plenty of folks who probably weren't around during the last bubble to learn this lesson, it's important to remind everyone why first day stock pops like VMware's are not a good thing, and certainly not something worth bragging about. The difference in price is actually an indication of how much money VMware left on the table. Yes, the company raised nearly a billion dollars by selling shares at $29, but it missed out on the money it could have taken if the shares had been priced closer to the $52 the market has clearly valued its shares at. In other words, it sold all those shares at about 55% of what the market valued the company at. Not such a great thing to brag about now. Of course, there are some advantages to having the first day pop. It does act as a PR mechanism, and it certainly does bode well for VMware if they want to sell more shares to raise more money. However, right now, it certainly looks like the company left approximately $750 million on the table that was snapped up by those trading the stock, rather than the company itself.

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Orbitz IPO Greeted With A Yawn

from the full-circle dept

Throughout its relatively short history, online travel site Orbitz has undergone quite a number of ownership changes. Last year, Orbitz' parent company was bought out by private equity firm Blackstone, which promptly decided to flip it back to the public markets. When it first filed to go public, there were many who argued that the company looked like a terrible investment for both operational and structural reasons. It looks like the market agrees with that assessment, as the IPO ended up pricing below its expected range. Private equity firms aren't infallible, and sometimes they're bound to buy companies that they can't turn into very much. But as more of these unimpressive offerings come to market, there's going to be increased skepticism over whether these firms can apply their magic touch to the tech industry.

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Investors Really Get Hot And Bothered Over Solar Power

from the sunburned dept

As we noted last week, one of the hottest sectors on Wall Street these days is the solar energy business. Chinese solar power companies alone have raked in over $1.1 billion so far this year through IPOs. It's starting to look like investors are going a bit crazy over these companies, as solar shares rallied hard across the board, following a few deal announcements. It's common for customer win announcements to be catalysts for an upward stock move, but there's something a bit disturbing about the way that so many solar companies moved sharply higher yesterday. Basically, what it means is that investors are being indiscriminate about what they're buying. This, more than the spate of IPOs, is a worrisome sign, since it looks a lot like a buying panic, the type commonly seen near the top of bubbles. One day's action doesn't make a bubble, but if you see more of these days, where every company in a sector moves in perfect concert, then it should be seen as a warning sign.

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