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So far in 2011, there has been a variety of IPO-related news surrounding the Internet and social media industries.

We’ll first look at Groupon, which last month, fresh off turning down Google’s $6 billion acquisition offer raised $950 million, the largest investment round for a startup in history.  This news came alongside rumors of an IPO as early as this Spring at a whopping $15 billion valuation.  Maybe they’re not crazy after all for passing on Google’s attempted takeover.

Still, I’m left to ask, “what’s the rush?”  Again, this company is just over two years old and has continued to grow at a remarkable rate.  Running to the public markets now raises questions around whether internally the company might feel its valuation has peaked and is looking to take advantage of that bubble.  There are a number of well-funded and established competitors, and the barriers to entry are small for other large players like Google and Facebook.   Further, considering the average quality of businesses coming through the pipeline these days, the miscalculated Super Bowl ads, and the recent Valentine’s Day FTD PR gaffe, I have concerns about Groupon’s ability to maintain its brand image long-term.

Next, we’ll turn to Demand Media’s IPO in the last week of January.  On its first day of trading, the company’s stock shot up more than 30%, but while that was lauded as a sign of success for the company, most people failed to realize that means the investment bankers responsible for taking the company public just didn’t do their jobs well enough and priced the stock too low.  Regardless, Demand raised more than $150 million and is now valued at over $1.7 billion, and who am I to say that’s not a success?

I have two primary concerns here though.  As a content farm, Demand Media is steadily rising up the ranks on Google’s Most Wanted list, and considering that Demand Media depends primarily on its placement in Google’s search results for revenue, this is a risky situation.  If Google takes significant action to prohibit the growth of networks like these (and I hope they do), then that will seriously diminish Demand’s value proposition.  Second, Demand’s financial statements reveal some questionable accounting methods, which make the company look much closer to profitability than it actually may be.  From my perspective, this company screams bad karma, and unless Demand can drastically improve the overall quality of its content, I wouldn’t touch it with your ten-foot pole.  Here’s a link to one of my favorite articles on the event.

Now, not to be just a Debbie-downer, I should mention two other companies that recently filed for IPOs, and these, I happen to think, are model businesses, which should do well now and in the years ahead.  The first is LinkedIn, the well known professional social network, and it appears that this IPO will serve as quite the payday for its founder, Reid Hoffman. LinkedIn has done a terrific job of understanding its users’ needs and wants, and by establishing itself as the clear frontrunner among professional circles, the company is in an enviable position for the monetization of corporations and individuals.

The other recent filer is Pandora, the (hopefully) equally well known music streaming service, which I happen to think is one of the coolest companies from the last decade.  Avenues for growth are plentiful through mobile devices, internet-enabled TVs and players, cars, etc. and as long as the music industry doesn’t foul up the distribution deals like television studios are doing with Hulu, Pandora will continue to grow.  Speaking of Hulu, what happened to their IPO?

Comments

6 thoughts on “Tech News Review – January/February 2011
  1. Jesse says:

    Mr. Burr, I’d be interested in getting your opinion on two issues here. The first, do you think Groupon will really have a $15 billion valuation next spring? With the market becoming saturated with copycats and tech valuations are at an apex (or quickly approaching) do you realistically think that Groupon can continue their trajectory and reach a $15 billion IPO?

    Secondly, how do you feel about Linkedin’s platform and direction? Linkedin undoubtedly has done a terrific job with the freemium model, but what’s next? I find that their groups have turned into a huge waste of time. I don’t find useful conversation there but rather everyone trying to market themselves. What have they done recently to innovate and keep their platform fresh? The most recent change I can think of is “Linkedin Skills” (http://blog.linkedin.com/2011/02/03/linkedin-skills/) but that was blatantly ripped off new LA start up Namesake, who had that feature since their beta launch. (Interesting note, Reid Hoffmann is one of the first members of the site.) Yes, Facebook has copied features from competitors as well, but they also make their own new features. They keep their profiles and page designs fresh and they just introduced new photo albums. Aside from my content, my Linkedin profile looks the same as it did when I joined in 2007. Do you think they can continue to be profitable and the leader in professional social networking for the long haul?

    1. Matthew Burr says:

      Sir Bouman, both great questions.

      As for Groupon’s valuation, I don’t think achieving a $15B valuation is out of reach for the company in the next four to six months. As of December, their revenue run-rate was estimated to be $2B, and I figure that is only due to rise; they’d have to get in their own way at this point to stop this momentum in the short term. The article points out that by those numbers, Google’s acquisition offer was only 2-3x revenue. To get to $15B, they’d have to be valued at 7-8x at the most, which is not crazy for a budding technology company. I think their prospects to maintain that value long-term past the next 18-24 months are slimmer though given the factors we’ve both mentioned. I think Groupon also realizes this, and that’s why they’re racing to the public markets. Compare that behavior to Facebook’s, as that company is intentionally dragging its feet on the way to an IPO and rightly so. Public money comes with a lot of strings attached, and the only reason I see a need for it here is if everyone’s just looking for a liquidity event.

      As for LinkedIn, I just think at the end of the day, they have achieved the necessary critical mass (almost 100M users) to stay relevant, and they do a good enough job of keeping those people engaged to the point where I don’t see a competitor challenging them anytime soon. The company has stood the test of time, and I actually believe that as a platform, it’s currently underutilized by most users which is a good problem to have.

      1. Matthew Burr says:

        And of course, while I was typing that response, this article came into my email.

  2. Jesse says:

    I agree that it’s a liquidity event for the investors. I don’t recall how much $ and % DST, Accel, and Kleiner have invested in Groupon, but those are large funds that need to produce multi-billion dollar exits to produce a 3-4x return for their investors. A fast Groupon IPO would quickly do this. It would also give them some room to hedge a few higher risk bets.

    This is an interesting read on starting your own Groupon.

    http://thenextweb.com/entrepreneur/2011/02/15/so-you-think-you-could-build-your-own-groupon/

  3. Matthew Burr says:

    It would be a hell of a payday for the investors, no question. However, funds like those you mentioned make investments on a five- or six-year timeline, and their investments here are no more than 18 months old. So, unless they’re worried about their payouts shrinking, why cash out now?

    Let it be said that I’m not arguing Groupon is a flash in the pan with no long-term value; I just think that a $15B valuation is unjustified. Facebook didn’t hit that number until early last year not long before it hit 500M users. If investors are pushing Groupon to an IPO as soon as possible, then maybe they believe that a bubble is forming. Some of these valuations seem to be growing faster than the companies themselves.

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