“Sharpen your Perception” “My wall gets all funny comments on facebook!” “My current employer approached me through LinkedIn!” “Her business tweets are a rage in market!” All such statements have penetrated our conversations and imaginations of late. Jointly, referred to as social networking, these sites along with the several others in similar or some what related line of business have brought back web based companies in to market focus. Having shown their deftness in technical strategies, will these new generation web based companies be able to showcase same acumen in their financial matters is the next big question. Does approaching market forms a part of their near term strategy? More importantly, should IPO be their next financial destination? Lets’ take a look at a comprehensive perception on the same…………….
LinkedIn’s announcement to raise $175 million in an initial public offering hasprovided a fresh impetus to the debate on current, hugely successful breed ofinternet based companies going public. On the tangible front, the largestprofessional networking site seems to be all set for a blockbuster IPO aftertripling revenue between 2007 and 2009. But the even greater implications arethose intangible in nature. LinkedIn is bringing the sizzling concept of socialnetworking to the practical business world. And what will this mean for LinkedInand its users now the company has finally decided to take the plunge?Still more prominent is the question about the ripple effect of one of the largestweb based companies of our times going public. After all, it has been a decadesince web based companies have been virtually our of the market limelight!First Mover?Although LinkedIn has definitely fired the starting pistol on what is expected to bea race to market by social networking websites, yet, it is not the first among thecurrent breed of net based companies to approach market.Before LinkedIn, Demand Media went public in January this year, witnessing atorrential debut on the stock market. The internet company, Demand Media,which uses proprietary algorithm to identify what web users are searching for onthe web, and then produces content to meet that demand, is often dubbed as alow cost content farm that churns out high volumes of pedestrian stories.Although the company’s revenue has grown substantially, it has never turned aprofit in its four-year history. In fact, it had an accumulated loss of approximately53 million US$ as on 30th September 2010. On top of that, it is heavily reliant onGoogle to drive its revenue. Despite such flaws in the business model and
financial history of the company, investors lapped up the shares on offer and it closed up 33 % higher on the first day of listing.Around the same time, wireless hotspot provider Boingo filed paperwork for an IPO to capitalize on the growth of mobile devices. It runs a worldwide, commercial, Wi-Fi network, with over 1.3 million users. Next in line to contemplate IPO was the biggest Internet radio company, Pandora Media Inc. It had filed IPO to raise 100 millionUS$ in February 2011.Then there are a whole set of Chinese companies waiting to tap U.S. stock market through initial public offering. Biggest name among them is of Renren.com, China’slargest social- networking service with features similar to Facebook. It is preparing an IPO of about 500million US$ this year. Some of the other Chinese companiesexpected to launch themselves in the market this year are Taobao (e-commerce giant), Taomee (children’s social network) and Vancl (online apparel retailer).Of late, internet companies have started showing first signs of coming of age with reference to market; yet, there is a perceptible dilemma among them about this move.Otherwise what else can justify their reluctance in approaching market despite a promising businessmodel, mounting revenues, and envious user base?Which way to go?Initial Public Offering, or IPO as we know it as, is the most potent financial tool to eliminate snags in theoperations. With extra cash in kitty, companies can look to invest in additional tools for differentverticals.International expansion could well be another aspect to the companys growth strategy. For example,post IPO LinkedIn might consider acquiring its German and French equivalents, or addition of extralanguages, expansion to BRICS countries or European market. Precisely, a whole gamut of opportunitiesopens up for deploying cash effectively. As they say, extra money never hurts!Though cash is the most common outcome of an IPO, in some restrictive cases, it also makes a companyindependent. Popular U.S. Web video service Hulu was prepared to raise as much as $300 million in aninitial public offering in October 2010. It meant possibility of freedom from its broadcast partners (ABC,Fox, and NBC), but now, since IPO has been shelved, it has no option but to remain saddled withcontinued uncertainty as it negotiates to keep partners’ content on board.While the IPO holds the golden key to unlimited capital access, the key itself comes with stringsattached. Major one being dilution of the focus area.
All internet companies are brainchild of innovative, bright, and gifted individuals; technocrats at best whose trump card to success is their discernible business models.Their ingenuity and constant strive to improve makes them and their business ideas ahead of time. Their sole focus is technology and development. What, if instead offocusing on technological up gradation, they have to sit down every quarter and look through financials, deploy business strategies to fulfill huge dividend expectations;an imminent fall out of going public? Surely, that seems a sure shot way of leading multibillion dollar business to dumps!Further risk stems on account of acquisition. Once listed, probability and ease of acquiring a company increases. In this case, it could act as a simplest way for players inother arena to jump on to internet bandwagon. Then there is dilution of control, a compromise which follows all IPO. It becomes even more prominent for technologybased companies, where external investor might not be well versed about investee’s core business operations. Perhaps, this is the fall out which Zyngas founder andchief executive Mark Pincus has spoken about in no uncertain terms when he referred to his sceptism about IPO. (Zynga is maker of popular online games, like,Countryville and Farmville)IPO does bring in considerable amount of financial freedom but it also fetches all manner of public scrutiny. Look at the Goldman Sachs investment in Face book. On onehand it has infused exorbitant amount of money in the social networking giant, but, on the other side, it has brought further scrutiny into the companys financials.When a private investment can increase intangible liabilities in such a manner, think about post listing scenario when entire world will be watching every move of thecompany, every moment. A double edged sword at its best! No wonder then that the internet giants like Facebook, Groupon, Zynga are taking cautious, baby steps forapproaching market.Astronomical ValuationWhat actually excites market about the current crop of net based companies is their unique product at offer. Over last one decade it has gone form strength to strength,eliminating doubts and hiccups along the way. As a result, they command astronomical valuations which make them a suitable case for next wave of internet companiesIPO. Some of the mind boggling valuations in limelight are: Global financial services firm JP Morgan Chases new social media fund is believed to be in talks to buy a minority stake in Twitter, an investment which pegs the value of the micro-blogging site at over $4 billion. Investment firm General Atlantic is expected to buy a 0.1 per cent stake in Facebook, an investment which will value the social networking site at USD 65 billion. The last major investment in Facebook, made in January this year by Goldman Sachs had valued the company at USD 50 billion. Zynga is valued at 10 billion US$.
Date with historyIn all the frenzy that surrounds deliberation about valuation and next market move of internet companies, are we overlooking the market itself? In our zeal to chargeup the market, are we setting ourselves for another bubble burst down the line? This imminent internet IPO boom has uncanny resemblance to the first internetboom of the 90’s.Astronomical valuations assigned to these companies have given some observers flashbacks to the dot-com bubble of 1999-2000 and the subsequent market crashthat wiped out scores of companies and billions of dollars in shareholder equity, and plunged the United States into a recession.However, there is another set of observers which maintain that the similarity between then and now ends at both set of companies being net based. Over that thereis no parallel whatsoever. Present bunch of internet companies with massive valuations, also, have massive revenues in the hundreds of millions or more, andoperating profits in the tens of millions, if not more. Micro blogging site, Twitter, which does not provide financial information, has reportedly generated anestimated $45 million from advertising in 2010 and was expected to generate about $150 million this year. Facebook had $1.2 billion in revenue in the first ninemonths of 2010 and $355 million in profit, according to a Goldman Sachs prospectus pitching the company earlier this month to investors. Hulu has a revenueforecast of $260 million this year.Simply putting, these internet companies have metrics to boast of, which their predecessors that went public in 90s didn’t have. Remember, Google went public in2004 at under $100, and nearly everyone thought the company was overvalued.Even market has changed considerably from the previous decade. First of all, consumers are now more comfortable in spending money using web. Second, web hasbecome extensively a mobile medium. And lastly, there is a strong pent up demand in market to invest in these companies.Back in the dot-com era, most retail internet investors were buying on the come, on promises that affirmations of Web 1.0 entrepreneurs would come true. It indeedcame true but only a decade later.ConclusionScenario in attendance is unique, both for internet companies, and market. Brimming with opportunity, it is equally apprehensive, with companies concerned aboutstraying too far from its competencies, and markets fearing a rewind of dot com bubble of the nineties. The valuations may look massive, but as they say on WallStreet, “Don’t fight the tape.”
About Investeurs Consulting P. LimitedInvesteurs Consulting Pvt. Ltd. is a business and financial advisory company, successfully serving businesses since 1994; we offer advisory andconsultancy services for successful fund syndication. We have serviced diverse businesses by arranging finance of over $1600 million. We arestrategic advisors to our clients during the ideation phase, implementation guides through start-up phase, and trusted advisors overall.All businesses go through a similar life cycle. Once an idea is conceived and a business is established, a company requires capital to fund ongoinggrowth and expansion. The Capital Structure has to be optimally structured during each phase of business cycle. Investeurs perceives therequirement and accordingly arranges funds to help companies smoothly achieve milestones in the process.Investeurs Competency Kit• Alignment of services with client’s business• Round the year Financial assistance• Facilitator between Banks and Clients• Hassel free & on time service• Industry & Market updatesDISCLAIMERThis document has been prepared and complied for the reference and information purposes only. The views expressed in this document are personal to theresearcher and do not reflect the view of any authority in any manner. The material is collected and referred from various print and electronic media, Investeurs doesnot take any responsibility of the correctness of the same. Please consult your attorney, before acting on any information of this document. INVESTEURS EDUCATION GROUP, S-16, U.G.F, GREEN PARK EXT., NEW DELHI , www.investeurs.com