Is there a new tech bubble brewing in Silicon Valley?
That seems to be the question de rigueur for tech pundits and financial columnists. The surge of LinkedIn’s stock price on its first day of public trading harkened back to the frothy days of the late 1990s when companies with little more than people, computers, and pie-in-the-sky ideas could lure investors. The case of LinkedIn is different—it actually makes a profit, unlike many 90s era startups—but it has been trading well above what its revenue and profit numbers would otherwise predict, leading to continued hand wringing.
If anything, the LinkedIn IPO is serving as a test bed for a new round of IPOs for social networking companies. The investment banks that advised LinkedIn for the IPO caught a lot of flack for low balling the valuation. Peter Thiel, a PayPal co-founder and Facebook investor, told Aaron Demosky of the Financial Times that he felt “the bankers screwed up.” Joe Nocera was even less politic when he wrote about the valuation in the New York Times. “If there’s one thing we’ve all learned in the aftermath of the financial crisis, it’s that stiffing your client is not a crime. Not if you’re an investment bank.” Perhaps as a reaction to that criticism, Pandora raised its offering price twice before the IPO date.
The attention the LinkedIn IPO has received is justified. Forthcoming IPOs are likely to be much, much larger. Groupon, which estimates itself to be worth upwards of $20 billion, has filed the papers for its IPO. Zynga, the social game developer, is also expected to file soon. And Facebook, the largest of them all with a potential $100 billion valuation, describes its IPO as “inevitable”.
Some fears of an impending bubble have tapered off in the past weeks, driven by the drop in LinkedIn’s share price and Pandora’s IPO, which started at $16, reached $25 in intraday trading, closed the first day at $17.42, and has been hovering between $13 and $15 ever since.
Despite all the worry about a new bubble, venture capitalists are eager for more. Though a survey by the National Venture Capital Association found that “9 out of 10 venture capitalists think the financial markets are still too weak to support a lot of IPOs,” according to a Marketplace report, VCs think there need to be two-times more IPOs this year. While social media has received most of the buzz, other companies like those in medical devices, the life sciences, and clean technology, have had a difficult time transitioning from private to publicly held companies. These sorts of firms may be less bubbly, having tangible products to sell and good prospects at international expansion.
Photo by mariosundar.