Online venture IPOs: How are they performing ?

Most of the technology companies start as garage ventures before attracting the eye of evangelists to fund the idea. The initial first stage funding is often done by the Venture Capital firm. So how does a VC firm actually identify a potential future Microsoft or Apple? According to Guy Kawasaki, a VC should ideally look to fund a start-up started in garage by two individuals who are looking to create a product they themselves wish to use. IPO ( Initial Public Offer) is a popular route for a VC firm to exit the venture and realise a sizeable return on their investment besides tax benefits in certain countries.
 
Here’s a list of 10 online companies that have considered the IPO route and their journey so far:
 
1.Yahoo
The story of yahoo is one for the history books. Started in 1994 by Jerry Yang and David Filo, the company became the darling of Wall Street till the dot com bubble burst, when its share prices crashed from an all-time high of $118.75 to $4.05 on September 26, 2001. Yahoo which once became immensely popular due to its search engine missed an opportunity to acquire Google for roughly 5 billion USD which could have created the largest online company in that period and a game changer for the industry. The company still holds a minority stake in Alibaba.com and with a share price of $22, has a market capitalisation of 26 billion USD. 
 

2.Google

One of the world’s most valued companies, it was started by Sergei Brin and Larry Page( both PhD students at Stanford University) in 1996 ( incorporated in 1998). The founders at one point of time offered to sell their search engine to EXCITE CEO George Bell for 1 million USD( who rejected the offer) as it was affecting their academics by consuming too much of their time. Google had its IPO in the year 2004 and presently trades at $835 with market cap of 275 billion USD. The company has big plans with its recently unveiled “Google Glass” and is one of the most tracked companies by analysts worldwide.

3.Amazon
Started in 1994 by Jeff Bezos, Amazon today is the world’s largest online retailer. The company had its IPO in May, 1997 and its shares presently trade at $273 with market cap of 124 billion USD. The company has transformed the publishing industry with the launch of Kindle readers and is reportedly also working on an Amazon Phone to take on Google.
 
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4.Facebook
The social network started by Mark Zuckerberg and Eduardo Saverin, had its dream IPO last year valuing it at an astronomical 100 billion USD. The stock crashed following the IPO, reducing to less than half its market cap before recovering to current stock price of $28 with market cap of 67 billion USD. More than 1 billion users are registered on the site making it the second most popular website in the world (next to Google), though questions still linger over its revenue model and absence in the Chinese market.
 
5.Linkedin
This professional network is one of the highly rated internet companies of all time. In fact unlike most online companies, its share price has more than tripled its 2011 IPO offer of $45 per share in less than 2 years. The company presently trades at $173 with a market capitalisation of 18 billion USD.
 
6.Groupon
This company started in 2008, initially changed the way customers shopped online with coupons and deal of the day. However the company has been consistently posting losses and is looking for avenues to restructure its ailing business. The company recently fired its founder and CEO Andrew Mason and presently has a market cap of 3.54 billion USD.
 

7.Baidu

While most people credit “Page Rank” to the founders of Google, the method was actually developed by Robin Li in his search engine “RankDex” who later on patented it and used it while developing Baidu. This search engine launched in 2000 is China’s answer to Google with nearly 70% search market share in the world’s largest internet market. The company is listed in NASDAQ through ADR(American Depository Receipts) and has a market cap of 31.6 billion USD.
 
8.Sina Corp.
This Chinese online infotainment company operates Sina Weibo, the microblogging site that has nearly 56% share in the Chinese market with more than 100 million registered users. This company is one of the fastest growing internet companies and is listed on NASDAQ with a market cap of 3.2 billion USD.
 
9.Zynga
Have you played Farmville or Cityville? Zynga is the company behind these games on social networks like Facebook and Google+. The company has lost more than 70% of its IPO value and is now looking to enter the casino business. It presently has a market cap of 2.8 billion USD with share price of 3.55 USD.

So which is the 10th company? Twitter! The world’s favourite microblogging site is all set to launch its IPO in early 2014 (or last quarter of 2013) with an expected valuation of 10-15 billion USD according to various reports. It’s revenue in 2012 is expected to be about 260 million USD, so we are essentially considering a revenue multiple of 40-60 at these levels of valuation. With over 100 million users, Twitter in fact leads Facebook as Japan’s largest social network! It is extremely difficult to value a company like Twitter owing to its business model as one cannot be certain about its revenue growth trajectory. Can advertisers convey their message in 140 characters? Will they tweet directly to the users? Are trending topics and hashtags, Twitter’s answer to Facebook likes and Google’s AdSense? Online company valuations have another unique problem as we are essentially trying to value an entity that has no physical assets (it might own but we are technically valuing just the website!). Furthermore, it is more risky from an investor point of view as a new better alternative might emerge (much sooner than in case of normal brick and mortar entities) which can eat up this website’s visitor hits and market share. Is revenue multiple the only valid approach for valuing a firm like Twitter as comparable approach will not work due to the uniqueness of the business model? But even then, revenue multiple figure might vary based on the expectation of the market without reflecting the intrinsic value. Twitter on its part is working hard to transform itself into a news update service and not just another social media network, which will makes its business model even more differentiated. While these questions remain unanswered, this IPO will definitely be tracked by many world-wide. Will Twitter head the Zynga way or outperform like Linkedin? This perhaps is the factor that investors should  consider rather than delving into pure numbers.

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Online venture IPOs: How are they performing ?

by Abhirup Bhattacharya time to read: 5 min
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