Fear of Past Dot Com Crash: Venture Capitalists Only Interested in Consumer-Targeted Companies like Facebook or Groupon

Fear of Past Dot Com Crash: Venture Capitalists Only Interested in Consumer-Targeted Companies like Facebook or Groupon

 

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via online.wsj.com

The dot com crash has had a big impact on how venture capitalists invest in the current market. To understand why, it is important to know a little history about the impact of the Internet and why these investors are leery.

The Internet became commercially popular in the mid-1990s.  By 1995, there was an estimated 18 million users on the net.  This led to the creation of online businesses which led to speculation about how big these companies could grow.  The problem came with how much these companies were actually worth vs. how much they were perceived to be worth. 

What causes a bubble and eventual crash?  When people get excited about a company stock, it can drive the price up but if it inflates to an unrealistic point where investors get wise to the fact that the company can’t be worth as much as they hoped, people bail, sell the stocks, the price drops, and the company crashes. 

The pain of those dot com crashes are still felt today.  Venture capitalists now may be more hesitant to invest.  Tom Abate with SFGate.com said that venture capitalists in 2000 made about 8000 investments valued at $100.5 million.  “In 1999 and 2000, Wall Street invested in 534 venture-backed initial public offerings.” Those, who cashed in early, made a lot of money.  As large amounts of money were being put into the market and speculation was growing, the bubble was forming.  NASDAQ hit its peak on March 10, 2000 at 513252, only to lose 78% of its value by October, 2002 when it dropped to 11411.

In 2001-2002 while a lot of companies were over-valued and going bankrupt, people found their stock purchases were not such a great investment.  So now when Facebook and Twitter are considering going IPO it has some potential investors concerned.  This is especially true in the case of Twitter that has yet to publically show their business plan. 

What has the effect been on venture capitalists investing?  An article in Investopedia stated, “In the year 1999, there were 457 IPOs, most of which were internet and technology related. Of those 457 IPOs, 117 doubled in price on the first day of trading. In 2001 the number of IPOs dwindled to 76, and none of them doubled on the first day of trading.” SFGate.com reported, “In 2008 and 2009, a total of just 18 venture-backed companies went public.”

Investments have picked up for the consumer-oriented companies like Facebook and Groupon.  However there has been a venture squeeze for companies with business products.  Wall Street Journal reported, “In the first three months of this year, venture-capital investment in consumer tech companies nearly tripled to $874 million from $310 million a year earlier. Meanwhile, investments in tech firms with business products rose at a slower rate to $2.3 billion from $1.9 billion a year earlier.  The shift away from business-oriented technology start-ups has been gathering steam over the past few years. Venture investment into such companies was $11.9 billion in 2010, down 35% from $18.4 billion in 2006, according to VentureSource. The overall number of financing rounds these companies received also dropped 18% to 1,261 during that time.”

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LinkedIn IPO May Be Sooner Than You Think

via google.com

LinkedIn has already completed the first step in the IPO process.  With over 90 million members in over 200 countries and an estimated worth of $2 billion, its growth is undeniable. All Things Digital reported, “LinkedIn, the online business networking site, is likely to file regulatory documents for an initial public offering as early as today, according to sources close to the situation.”

Linkedin may not be the only big name going IPO soon.  According to All Things Digital, “LinkedIn’s entry into the public market is one that many expect will be followed by other Internet firms in the coming year, including Zynga, Chegg and, most anticipated of all, Facebook.”

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Why Companies Are Not Going IPO: Are Skype, Twitter and Facebook Projected IPOs in 2011?

There is a new trend for companies to remain privately owned.  Why have mega-companies like Facebook yet to go public?  The New York Times reported recently, “An I.P.O. used to be a rite of passage for a company, a sign that it had arrived. But even before the financial collapse of 2008, some entrepreneurs and financiers worried that America’s markets were somehow losing their edge. That would be bad news not only for Wall Street but ultimately the entire economy.”

Investors are frightened due to the recent stock crash.  Will the economy suffer if there isn’t an infusion of new companies in the stock market?  The numbers are definitely down.  According to The New York Times, “The annual rate of I.P.O.’s peaked in 1996, when around 756 American-based companies went public, according to Dealogic. That figure fell to a low of 36 during the financial crisis in 2008. It picked up to about 50 in 2009 and, so far this year (2010), it is running at about 100, excluding G.M.”

There has been talk that IPOs will pick up in 2011.  There are some major companies that have hinted at going public in 2011.  Here is the latest on some of the most discussed possible entrants into the IPO market:

  • Skype – TMC News reported, “Skype originally filed an S-1 registration statement with the Securities and Exchange Commission back in August, but have made several major moves since that may have pushed back the company’s timetable.”
  • Facebook – Although it is possible they could go IPO in 2011, recent talk has indicated it will probably not happen until 2012.  ComputerWeekly stated, “Facebook is preparing to sell stock through an initial public offering (IPO) in 2012, according to a document published by the social networking company. The document revealed that the number of Facebook shareholders will increase above 500 this year, forcing the company to go public or disclose financial information.”
  • Twitter – Some have speculated Twitter would be going public but ReadWriteWeb reported differently.  “According to CEO Costolo, Twitter has grown quickly recently, with 100 people joining the company in Q4. While the company recently raised $200 million in funding, Swisher wondered what Costolo saw as the company’s future – would it sell or would it go public? Neither, said Costolo.”

Companies go public to get money.  There are other advantages.  According to Investopedia.com, other reasons to go public include:

  • Because of the increased scrutiny, public companies can usually get better rates when they issue debt.
  • As long as there is market demand, a public company can always issue more stock. Thus, mergers and acquisitions are easier to do because stock can be issued as part of the deal.
  • Trading in the open markets means liquidity. This makes it possible to implement things like employee stock ownership plans, which help to attract top talent.

There are some disadvantages to going public.  According to Findlaw those disadvantages include the following.  I recommend going to Findlaw’s link to read the full explanations behind each of these disadvantages:

  • Time and Expense 
  • Disclosure
  • Decisions Based on Stock Price
  • Regulatory Review
  • Falling Stock Price
  • Vulnerability
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