Perhaps you've heard that Facebook is going public this week in a massive IPO that values the company at over $100 billion. There's an apocalyptic air about the frenzy to be the first to invest in Facebook, as if this is the last chance we'll ever have to throw our money into an overhyped tech company stock. And here is a story that perfectly captures the dread and sadness I feel when confronted with so many people's boundless money-related optimism.
This summer's no-brainer career move now looks like a headscratcher. Vish Makhijani left his job as Yahoo's head of search in June to join Yandex, a Russian search engine which had filed for a $3 billion public offering the month before. Getting pre-IPO stock options, with the exit in plain sight? Much better than watching Yahoo shares sink from $34 to below $13. But Yandex has postponed its IPO plans. Anyone want to take bets on how long Makhijani will stay as CEO of Yandex Labs, the company's U.S. outpost? Memo to Vish: Microsoft may still be hiring.
Conventional Valley wisdom: The chaos in the public stock markets won't affect private companies, right? Wrong. In August, LinkedIn had set plans to let employees sell some of their shares to investors. Interest in the company had been keen, given its stated plans to wait to IPO rather than sell out. But the stock-sale plan was conditioned on the Nasdaq index staying above a certain level. It has since fallen through that floor, meaning employees will no longer be able to sell their shares. And we hear Bain Capital, a major LinkedIn investor who's backing the stock-sales plan, has the right to walk away if the Nasdaq doesn't recover by mid-October.
Later this week, San Francisco biotech startup Fluidigm plans to become only the seventh venture-backed startup to go public this year. 86 venture-backed startups pulled the trick last year. “This is terrible timing for this company,” said Scott Sweet, a senior managing partner at specialty research firm IPO Boutique, to the New York Times. Fluidigm, which makes a rubber-based circuit for life-science research, should be intimately aware of that. It's backed by bankrupt investment bank Lehman Brothers' Healthcare Venture Capital division. Fluidigm wants to raise between $70 million and $85 million. Sweet doesn't think it's going to happen. “In this environment, when people are feverishly babysitting the little profits they have left in their core positions, why would they want to take a risk on Fluidigm?” (Photo by azrainman)
Venture capital is a game of hits. That's part of the reason why the industry is so secretive — most startups fail, with the few successes paying back investors, if the're lucky. Sunshine, venture capitalists feel, would merely serve to highlight the awkward in-between stages. That's what's so curious about Advanced Equities, the Chicago-based VC firm which has sprung up out of the blue, and is now talking about going public. As Forbes amply documents, it's a rotten business.Founders Keith Daubenspeck and Dwight Badger have suspect pasts as stockbrokers. The start of their careers as VCs is equally inauspicious: They raised $28 million for Pixelon, an online-video startup later revealed to be a fraud run by a con artist. Advanced Equities has been involved in several lawsuits with clients, Forbes reports; has a poor track record of profitable exits; and a reputation for overpaying to get in deals. But what speaks most to Daubenspeck and Badger's bad business judgment is this talk of going public. In the last bubble, CMGI, an Internet holding company with a large venture-capital arm, posted overheated returns by flipping its startups for cash, and then crashed all the more quickly when the tech-IPO market seized up. With private equity abundant, why would Advanced Equities even want to tap the public markets? Especially with the scrutiny that would mean. If Forbes was able to find all this dirt with a little digging, imagine what the company would look like under the glare of analysts and short-sellers.
One's tempted to praise Rackspace, the San Antonio-based Web-hosting provider, for having the bravery to try an IPO at a time when most tech companies are doing everything they can to avoid the public markets. But with its stock closing the day at $10.01, almost 20 percent below the offering price, Rackspace's IPO was a crashing disappointment. As has the service to its customers. Rackspace once promised "fanatical" customer service. But the company's management seem most fanatical about taking care of themselves.Last November, one of its datacenters was brought low, embarrassingly, by a truck crashing into a nearby power transformer. That's precisely the kind of thing datacenters are designed to survive, but Rackspace's did not. Its employees all got bonuses anyway. That's a fanatical disservice to its investors, who now include public shareholders. A more deserving tech company, one hopes, will come to the public markets soon, and erase the memory of Rackspace's broken offering.
PayPal's CEO is talking up the company's business handling payments on websites other than eBay. Where have I heard this before? Oh yes: In April 2002, when I had coffee with Peter Thiel, then the CEO of PayPal as an independent concern. He talked up the prospects of growing PayPal's business on other websites. He agreed to sell PayPal to eBay for $1.5 billion that July, and left three months later. And then I heard the story again, and again, and again, as eBay pushed a number of forgettable executives through the revolving door of PayPal's executive suite.The swift executive rotation was a deliberate strategy of former eBay CEO Meg Whitman, a management consultant by training. She called it "repotting" — moving executives around through different parts of the business. While it may have helped her charges' careers, it did nothing for PayPal. The latest potted plant to occupy PayPal's C-suite, Scott Thompson, is bragging to investors that PayPal will soon derive more than half its revenues from websites other than eBay. A good thing, considering how growth in eBay's core auction business is grinding to a halt. Thiel saw this as a problem back in 2002. eBay was growing fast at the time, but PayPal's investors — the company was briefly publicly traded before eBay bought it — were worried about its dependence on another company. After eBay bought PayPal, executives spent years grinding away at "integration" — even though PayPal, as an independent concern, had managed to neatly fit its payment service with eBay's auctions, without much help from eBay — in fact, with eBay actively trying to replace it with its own BillPoint payment service. In the years since, what has eBay done with PayPal? It's recycled ideas from the Thiel era, and tried to tout them as "innovatons." It has swollen the size of the PayPal unit to some 7,000 employees. ("What do they do?" a former PayPal executive asked me.) And it has leaned on PayPal to mask slow growth in its core business. How much would PayPal be worth now on its own, without eBay's bloated management? Would Amazon.com and Google even be trying to challenge it in the payments business? Perhaps it's a question that shouldn't remain abstract. eBay tried to buy PayPal several times; every time eBay returned to the bargaining table, PayPal's price went up. It finally took the workings of a liquid market to determine PayPal's worth; after PayPal's IPO, eBay had to pay a fair price for the payments company. Yes, it's time for another PayPal IPO. Too bad Peter Thiel isn't available to run the company — he's making far more money on his hedge fund than he ever did from PayPal. (Photo by David Orban)
“I get cranky when talk turns to an IPO ‘drought,” says Lise Buyer, the former Wall Street analyst who took Google public in 2004, in an interview with Private Equity HUB. There were zero tech IPOs last quarter. July 2008 had the fewest IPOs of any July in the past four years. Buyer's not sure all that is such a bad thing.
Here's a worthy contrarian to pop the bubble in Facebook bears. In 2003, former Wall Street analyst Lise Buyer wrote Google CEO Eric Schmidt and founders Larry Page and Sergey Brin a note reading: “I don’t know if you’ll ever want to go public but I bet that, having been on the other side of the table, I could be helpful to you if so.” Now, four years after Schmidt, Page and Brin said yes and Buyer helped take Google public in 2004, she's got the same message for Facebook. "To be candid," Buyer told Private Equity HUB, "I’d love to work with them." She said why:
At a recent company meeting, management told LinkedIn employees they would soon be allowed to sell as much as 20 percent of their vested options at a $500 million valuation. Word leaked yesterday that Facebook plans to allow its employees to do the same. Both LinkedIn founder Reid Hoffman and Facebook founder Mark Zuckerberg want to take their companies public — and thereby get their employees paid — but it won't happen soon. LinkedIn expects to earn about $100 million in 2008, but VentureBeat reports that bankers want to see that number hit $200 million before bothering to file papers. The public markets aren't hungry enough for anything less. In July, only 56 companies went public, raising $5.6 billion in their IPOs. During the same month last year, 190 companies raised $31.7 billion on their initial foray into the public markets.