The Facebook IPO was supposed to be Silicon Valley’s shining moment. It’s the book-end for the decade of recovery that followed the first wave of consumer Internet companies. It was the debutante ball for the next great Silicon Valley company, the one with the most potential to last a generation or longer.
Instead, it’s turned into a public relations disaster. If we look a little more closely though, the Facebook IPO probably has more devastating consequences for the rest of the late-stage private market than it does for the company itself.
The late-stage market may have to reprice: Facebook is the latest major consumer Internet IPO that has underperformed compared to where it traded in secondary markets. In the final weeks of secondary market trading, we were seeing shares change hands at $40 and $44 a piece. Even though trading volumes aren’t that high in these secondary markets, Facebook had the most activity and it had years of pricing history.
The thought was that those prices were probably close to the public market prices. It was going to be hard to gauge what turned out to be an abnormally high amount of interest from retail investors. Those secondary markets may have helped convince Morgan Stanley and Facebook to raise the range from to the original $28 to $35 to the higher $34 to $38 range.
But actually, later-stage valuations were kind of wrong. Zynga and Groupon are in similar positions. Investors like T. Rowe Price who went in on Zynga’s Series C round in February 2011, bought shares at $14.03 a piece. They’re now at $6.61. (Sad face.)
Secondary market buyers just need to be a little more cautious about investing in pre-IPO companies if they are not in it for the long haul. It’s still possible to make money. It’s just that public markets are not blindly going to 2X or 3X a late-stage valuation. Investors that gave Groupon, like, a billion dollars a year and a half ago are still in the black. They paid what is now $7.90 a share, if you factor in stock splits. Now the shares are at $12.05. The last big financing round in Facebook is also up by about 80 percent from a year ago, when Goldman Sachs went in on Facebook at a $50 billion valuation.
Last week at TechCrunch Disrupt in New York, Union Square Ventures’ Fred Wilson said, “Wall Street is going to value your business on your growth rate and your cash flow. Once you go public, you’re going to have to deal with a different kind of investor.”
He added, “The IPO market is back. But what people have to recognize is that companies are not going to get valued in public markets the same way they were valued in the late-stage market. The late-stage market is giving higher valuations than the public market is, so that means that the late-stage market is going to have to settle down.”
So investors need to be more conservative about how they think public markets will ultimately value their late-stage deals. Evernote at $1 billion? Dropbox at $4 billion? Spotify at $4 billion? These companies can only go out to public markets at those valuations if they have the current run-rate and growth trajectory to support them.
Facebook can overcome this if it has another “Calm down. Breathe.” moment:
If we’re debating about whether this was a “good” IPO or a “clusterfuck” of an IPO, it really depends on whose point of view you’re taking.
If you’re looking at the long-term picture for Facebook, the IPO was not bad at all. They raised $16 billion, with about $7 billion going directly into the company and the rest going toward early shareholders. Even though Facebook had the worst five-day start for an IPO out of the largest deals of the last decade, the company is washing out more of the short-term speculators, leaving room for believers who will hold the stock for the long-haul.
Also remember: Pissing people off, then apologizing and iterating your way out of it is classic behavior for Facebook. Facebook usually does one thing a year ago that really pisses people off. Then they fix it. It’s what they do. It’s never really intentional either. The euphemism for this is, “Move Fast. Break Things.” The only reason they can’t address the situation is because of the quiet period, but they’ll have a strategy once they’re out.
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