Back in the 1990’s many will remember the glory days of the NASDAQ. Computers were basically new, and everywhere you turned someone was starting a company, and then selling out for a gazillion dollars. It was a great time for many, and there were great advances. But then came the companies that “seemed like” they were the next big thing. We saw a plethora of companies that were getting money thrown at them hand over fist just because they had a great domain name. (remember Pets.com?) A great sounding name was the key because if you had the catch phrase, easy to remember .com spelling, and a memorable mascot or icon, well success was then guaranteed right? Business model be damned. Don’t worry about that. This is a new era, and demands “New” thinking. All that other “business” stuff will work its way out over time. And shortly after that we all remember what happened, don’t we?
We once again might be looking at history repeating, or shall I say rhyming? I don’t know if I’m correct, but my observations of a few critical factors are telling me there is something very, very, very important to watch coming up.
LinkedIn will be offering its IPO to the general public Thursday. It will be greeted by all the press with great fanfare. However, there are a few keys that may demonstrate the fallacy in the valuations for not only LinkedIn, but the whole social media company genre. Valuations for these companies are based on linear extractions of the prices paid by the so-called “Smart Money” who invest first, and is not open to the general public. The IPO is not based on the business model, but more on what the smart money thinks you will pay. So far, they have raised the price up, and increased the offering because they believe people will be clamoring to get in. What if it doesn’t go as well as thought? What are the implications? Here’s where it could get a little tricky just like the 90’s. Why? All the “Big Boy’s” are right behind it like Facebook just to name the obvious. Currently Facebook is said to be worth gazillions of dollars. But again, those valuations are based on what someone “thinks” its worth. Not what people have actually purchased in shares. And just like in real business, it only matters what someone will pay, and that the check clears. All else is irrelevant.
Remember General Motors IPO? That went off with great fanfare. It was said to be worth so much more than they were going to let you the general public get in on. They set what was heralded as such a fantastic buying opportunity that if you didn’t get in now, you would never get a chance again because people were lining up to buy. Well they did buy…and then they sold, and they’re still selling. You can today buy GM shares as of this writing at a 10% discount than the price they said you might never see again. There just might be more truth in their statement than at first blush.
If LinkedIn goes well, they’ll be partying to be had like it’s 1999. If it goes badly, it will be tears around, just like 1999.
© 2011 Mark St.Cyr All Rights Reserved