Tech IPOs making a comeback in 2011?

Venture capitalists split over whether tech initial public offerings will peak this year, but agree companies and investors are savvier today compared to dot-com bubble a decade ago.
Written by Jamie Yap, Contributor

Venture capitalists are mixed on whether 2011--a decade since the dot-com bubble bust--will see the comeback of initial public offerings (IPOs) from tech companies. However, they are unanimous about one thing: investors and companies are savvier today when it comes to the hype and pressures of going public.

"2011 will not mark the comeback year for tech IPOs," said Dennis Phua, executive director at Singapore-based Azione Capital. In an e-mail interview with ZDNet Asia, he noted that tech IPOs are more likely to occur next year.

Despite news that professional social networking site LinkedIn has filed for IPO this year, Phua argued that other online giants such as Facebook and Twitter would likely opt for another year of private investment before "taking on the downsides of going public", where they would be more closely scrutinized.

Besides LinkedIn, other online sites such as digital content company Demand Media and music service Pandora have already gone public.

Rather than IPOs, venture capital (VC) firms will be driven this year by the prospect of private sale exits, according to Phua. The likes of Google and Microsoft are expanding horizontally beyond their core businesses, and VCs will aim to "head there and sell out", he explained.

"Currently there is insufficient IPO interest in tech companies, so the private sale exit [option] is preferred", Phua said, attributing the lack of interest to unclear revenue models for tech companies. "There have been lessons from the tech bubble of 2000 that companies without good revenue models are unsustainable businesses."

Phua's view contrasted with that of Dick Kramlich, a 42-year-old VC veteran, who said in two separate Bloomberg reports that he expects 2011 to be a "breakthrough year" for "blockbuster IPOs" from technology companies.

Michel Birnbaum, general partner from another VC firm, iGlobe Partners, was also upbeat on the tech IPO scene. He told ZDNet Asia in an e-mail that the IPO market for technology stocks started to resurface in 2010.

"In 2011, notwithstanding macro or geopolitical events, we should continue to see a good tech IPO market; and we will certainly see more euphoria if one of more of the Internet 'all stars' come to market," he added.

Birnbaum noted that social media companies are basking in the IPO hype limelight, as such sites have the potential for high valuations and easier capital market success, and hence fees for the banks. These companies can demonstrate revenue traction rapidly and therefore can come to the capital markets in a shorter time span, he explained.

For instance, Facebook, founded only seven years ago, already has more than 500 million users. In January this year, it was valued at US$50 billion after a round of investment amounting to US$1.5 billion. SharesPost, a marketplace for private company shares, pins its worth at US$82.9 billion.

Social networking sites "have tremendous user bases and [some] have not even scratched the surface in terms of the potential to monetize their user base", Birnbaum summed up.

Different from dot-com bubble
Birnbaum also observed that there is "a significant difference" between the dot-com bubble a decade earlier and companies entering the market now.

Today's companies, he said, are generating significant commercial revenue and some also show good profit levels. On the other hand, companies during the dot-com era a decade ago were going for the "land grab" and had little to no revenue, to the point that they were loss-making, he noted.

During the dot-com bubble, "business rules were thrown aside" and thanks to the "wild euphoria of the markets", companies were using capital markets for their next round of venture financing, according to Birnbaum. The model at the time provided early investors with exits, while leaving market investors to take over the losses, he pointed out.

Birnbaum added that with companies today showing a more disciplined approach to growth, market investors should focus on what they see as the continued growth potential of these companies and the valuation commensurating with the growth and risk to sustain it. This is where the hype factor comes in, he said. For instance, if Facebook is worth US$60 billion, then its growth trend must continue at the same pace in order for investors to make money, he explained.

At the same time, market investors today are also more savvy and experienced analyzing tech companies than their counterparts in the dot-com era, Birnbaum pointed out. More importantly, they demonstrate more restraint and discipline in the amount they are willing to pay for companies, he said.

The danger exists in that they forget the experience of the past and succumb to the hype, Birnbaum warned. "If they do, then we may face another bubble and its usual consequences," he said.

The massive valuations and funding that sites such as Facebook and Twitter have garnered has lent to the hype that social networking sites, which boost huge user bases, will soon go public--though Facebook CEO Mark Zuckerberg, for one, has denied this back in 2007.

LBS finds investor favor
While Azione Capital's Phua said he did not think tech IPOs will emerge in 2010, he acknowledged that there has been more optimism in investor sentiment nowadays. With investor money expected to flow to deals in the next two to three years, tech startups are keeping an eye out for the best opportunities, he said.

Birnbaum of iGlobe Partners added that social media businesses may be getting the most publicity among tech entities, but mobile services companies including location-based services (LBS) providers, are another area of interest, though not necessarily as "sizzling hot" as social media.

Ryan Lim, business director of Blugrapes, which specializes in location-based social media, said the firm will only consider going public when the financial, business and market conditions are suitable. Another factor, he added in an e-mail, would be when "customer demand far exceeds what we are able to provide through organic growth and internal resources".

On the tech IPO hype, Lim noted that reports of secondary market trading of shares from the likes of Facebook and Groupon have probably sparked investor interest, since it breaks the decade-long dry spell of tech IPOs.

Investors are generally looking for something exciting and promising to invest their money in, even though the valuations of companies such as Facebook have been deemed unrealistic by some analysts and investors, he concluded.

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