Wednesday, June 1, 2011

Tech IPOs- Past and Present

I have a LinkedIn account. It is a professional version of Facebook where you can list a resume, give and receive recommendations to colleagues, join groups, and it is often the first place that companies and recruiters go to view potential new employees. LinkedIn has garnered a lot of attention in the news recently for its initial public offering- commonly referred to as an IPO- and there are concerns that its arrival to public trading is will bring back memories of the Dot.com burst that happened in the early 2000s.

 It isn’t just LinkedIn that is incredibly popular with investors right now- many technical startups including Groupon, Zynga, and Facebook are currently considering whether to offer their own IPOs, and underwriters are willing to do business with them.  Investment bankers are on the lookout for the next big innovative tech company to issue an IPO with, and excitement is high for these types of social networking websites (Tam, 2011).

In my research for this entry, there is some similarity between the rise of the Dot.coms and the rise of social media in terms of sheer popularity and willingness of banks willing to invest in these companies. In the early nineties, if a company wanted to become more popular, they just added an “e” to the front of their product or name. In 2000, seventeen different Dot.coms had commercials during the Super bowl (Timelines, 2011). Now most of these companies are in the history books for their spectacular crash and burn.  This link from Timeline gives a fascinating timeline of when the first Dot.coms started arriving until the bubble burst and the aftermath of it all. Today social media networking websites such as Facebook has become a central hub for people to communicate and plan events with.  500 million people have Facebook accounts, which I imagine is more than the number people who had Geocities webpages (oh, how I miss my page I created in 1996).

This brings up two issues that I’m going to address: what an IPO is and if there is a difference between the startup of today compared to the ones of ten years ago.

For companies past and present that wanted into the stock market, they have get funding by raising money through an underwriter from an investment bank. Goldman Sachs and Morgan Stanley are two examples of underwriters.  These underwriters drum up interest in the company by going to large scale investors to finance the startup so enough money is raised to issue stock. Once the underwriters figure out who will invest, the market conditions, and any other important information, the startup and underwriter determine the initial stock price (Investopedia, 2011). This entry from Investopedia gives an in-depth look at the process of issuing an IPO.

This process has been around for a long time but the term “IPO” didn’t come into the public lexicon until Dot.coms were planning and issuing their IPOs. The novelty and popularity of these companies caused a lot of people in charge- underwriters, the creators of the Dot.coms, investors- to overlook bad business plans (Wikipedia, 2011). There were startups of this era that became successful – Amazon and Google- but these were the exception because they had good business plans that accounted for the fact they wouldn’t have revenue profit (edited 6-2-11)for the first several years of business.  The rest of the companies blew through millions of dollars in months and went bankrupt (Wikipedia, 2011).

So now that LinkedIn has had their IPO, it “closed at $94.25, more than 109% above the $45 IPO price” (Baldwin & Selyukh, 2011),interest in underwriting is incredibly high for other social media sites and people are understandably worried that companies will be overvalued, and history will repeat itself with money and jobs lost to bad planning (Noguchi, 2011).

Fortunately, there are some positive differences between the internet startups of today- LinkedIn has been around for eight years and unlike the ones of ten years ago, does not have to spend millions to attract users because they already have them. Technology has also made strides in the decade- hardware is cheaper and faster than it has ever been. Ten years ago computers users were using the incredibly slow dial up to access the internet- now those users are a minority since most people are using cable modems and DSL lines (Noguchi, 2011).

While it is good to be cautious, especially when it comes to hundreds of jobs and millions of dollars, it seems that some hard lessons have been learned and people are excited to invest in innovative tech startups again. 

Baldwin, C., & Selyukh, A. (2011, May 19). LinkedIn share price more than doubles in NYSE debut. Retrieved June 1, 2011, from Reuters: http://www.reuters.com/article/2011/05/19/us-linkedin-ipo-risks-idUSTRE74H0TL20110519
Investopedia. (2011). IPO Basics: Introduction. Retrieved June 1, 2011, from Investopedia: http://www.investopedia.com/university/ipo/default.asp
Noguchi, Y. (2011, May 26). In LinkedIn IPO, Hints Of Another Tech Bubble? Retrieved June 1, 2011, from NPR: http://www.npr.org/2011/05/26/136655334/in-linkedin-ipo-hints-of-another-tech-bubble
Tam, P.-W. (2011, May 31). Echoing Around Tech Confab: 'Call Me'. Retrieved June 1, 2011, from Wall Street Journal: http://online.wsj.com/article/SB10001424052702303654804576349482665455162.html?mod=WSJ_Tech_LEFTTopNews
Timelines. (2011). Dot-Com Bubble. Retrieved June 1, 2011, from Timelines: http://timelines.com/topics/dot-com-bubble
Wikipedia. (2011, May 30). Dot-com bubble. Retrieved June 1, 2011, from Wikipedia: http://en.wikipedia.org/wiki/Dot.com_bust

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