The Return of the Internet IPO

Zillow priced their IPO yesterday and began trading today. Zillow increased their pricing range during their roadshow and then priced above the range at $20 per share and ended the day at $35.77 per share (valuing the company at $540 million when they priced and closing the day at $960 million). This is a great start for the first Internet company with run-rate revenues of less than $50 million to go public in a long time (with the exception of Jiayuan (NASDAQ: DATE) which did go public with a $50 million run rate but likely was able to price successfully due to its Chinese market focus). I remember the first IPO of a company I had invested in 1997. The company was Andover.Net (NASDAQ: ANDN), it went public in late 1999 with $5 million in revenue (it priced its IPO at $270 million). It is interesting to compare the relative revenue multiples of these, the company from the first Internet wave valued at 54x revenue, the second company from the current Internet IPO wave priced its IPO at 12x revenue.

There is no shortage of discussion and prognostication about the Internet IPO wave that is upon us. Many are suggesting this is yet another bubble where asset values are being inflated to levels that are completely unjustified. While I think there is definitely momentum around these companies and the valuations are healthy, there are some good arguments that the risk of many of these companies is much less and combined with their growth that this Internet IPO wave does not represent the same kind of irrational euphoria as the last time, Renaissance IPO has a good piece on this here.

I am more interested in what this market dynamic portends for the health of the entrepreneurial ecosystem and our economy as a whole. The reality is, there is a lot less venture capital available for companies (approximately $10 billion was invested into the asset class in the first half of 2011, this is about a $20 billion annualized run rate). This means that compared to most of the last 10 years, there is less money available for fast growing technology and Internet companies from venture capitalists. This means that they can’t hire as quickly, innovate as quickly and create economic activity as quickly as they scale without generating accelerated revenues and having access to other sources of capital. That is why I am so excited about what appears to be the opening of the market for earlier stage companies with approximately $50 million in revenue.

We all know of the success of the Yandex IPO (which we were happy to be Series A investors in 11 years ago) and the LinkedIn IPO. We also shouldn’t forget the success of the IPOs of Homeaway, Pandora, The Active Network and Zipcar. Additionally, there are a number of household names on file including Groupon and Zynga and there is huge anticipation around a Facebook filing. All of these companies, however, have in excess of $100 million in revenue and in excess of $1 billion valuations.

Now, however, it looks like the companies generating $50 million in run-rate revenues that are growing quickly and innovating in big and exciting markets have access to the public markets. This means the potential for substantial value creation by these companies as independent entities is more feasible. This is certainly good for the entrepreneurs that have built their companies to this level as well as for their investors but it is also very good for our economy and our country because these companies, if they go public and stay independent will create substantial numbers of jobs and GDP which will continue to drive the United States forward.

The next crop of $50 million companies that have already filed should feel excited that public market investors are open to them given the right team, story and market and I am cautiously optimistic that the capital markets system in this country is once again working for innovative and value creating companies in the technology sector.

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