An interesting detail about the recent Zynga IPO was that the company priced its shares at $10, well below the $14 a share backers like JP Morgan paid in the social gaming company’s last round of private funding.
Writing on his blog today, Fred Wilson argues that the recent public offerings for Zynga, Groupon, Pandora, LinkedIn and others have been rational. The companies have seen some volatility, but they haven’t jumped to insane highs and then plummeted to zero. “I was on the boards of some companies that went public in 99/00 and they were not ready,” wrote Wilson. “I learned that lesson the hard way.”
Mr. Wilson notes the fact that these companies went public at prices lower than their last round, but doesn’t make much of it. Over at Elapsed Time, Hunter Walker explores some interesting questions around this issue. “Will “Series D” later stage funds look for downside protection in the future, e.g. warrants that convert to more shares if an IPO occurs at a valuation below their investment (a form of preferences similar to traditional venture investors)?”
As Phil Black of True Ventures wrote, this is egg on the face of the investors who must now go to their LPs and write down the value of their investment. “I don’t think we are going to be the only group owning Zynga facing that odd situation of your portfolio company going public only to write down your investment!”
And as Mr. Walker notes, this may be further encouragement for employees to leave companies before the IPO so that they can sell their shares at the lofty valuations found on the private markets. “If IPOs are seen as valuation risks — that is, the public market is a harsher judge of value than private markets (because of more perfect information, because there’s more liquidity, etc) — then why wait for the IPO? Get out now, make your money and pay off the student loans, buy a house, etc. Who would have thought that the most successful companies would be seeing pre-liquidity retention issues!”