13 June, 2011

LinkedIn's IPO and Lumpy Bubbles

The LinkedIn IPO on NY Stock Exchange (not the NASDQ) on 20th May generated a frenzy of debate on the front page of business sections. Here are the bare bones of the story:
  • The company had hired Morgan Stanley and Bank of America’s Merrill Lynch division to manage the I.P.O. process. After gauging market demand — which is what they’re paid to do — the investment bankers priced the shares at $45. 
  • The 7.84 million shares it sold raised $352 million for the company. For this, the bankers were paid 7 percent of the deal as their fee.
    The price soared on the first day to $120 in intra day trading. The price has remained above $70 per share since then.

(Source: Google Finance)

I, like others eg NY Times' Joe Nocera think that LinkedIn's were (embarrassingly) poorly advised by Morgan Stanley.

This first day trading spike generated lots of chatter about another bubble. Here's the graphic from the Economist article: Welcome to IPOville - Social-media firms see champagne; others see bubbles




My view from this side of the Atlantic is much more conservative. There are pockets of frothiness, but it isn't across multiple sectors or sustained. Some companies will generate a disproportionate amount of interest (and column inches), but outside of that one company under the spotlight, there isn't tremendous demand pushing up prices across multiple companies.

I agree with this sentiment expressed in the Register: There is no big Silicon Valley tech bubble, says VC king in early May.
Forget what you may have heard: there is no massive tech bubble in Silicon Valley.
Instead there are hundreds of little bubbles, and they're set to begin popping at the end of this year. That's according to investor and "co-maintainer" of the bubble-blowing AngelList, Naval Ravikant. 
Fred Wilson of Union Square Ventures expressed it well at the end of April this year in a blog post, The Word Bubble:
But I am equally sure that we are in the glass is half full part of the cycle. Investors are focusing on the upside and ignoring the downside. That part of the investment cycle lasts for a while and then things change and investors focus on the downside and ignore the upside. Markets are defined by greed and fear. We are in the greed mode right now. 
Unfortunately, all these column inches will distract lots of people which will self stoke the entrepreneurial / VC sectors into investing in some very questionable businesses and markets.

I envisage danger down the line.

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