Yes, I realise that’s a contradiction, but it seems to capture the essence of deals such as Goldman’s investment in Facebook at a $50B valuation and Groupon’s half-complete $950 million fundraising effort. These deals are designed to provide significant liquidity for insiders (especially early investors and employees), provide a piggy bank for continued aggressive growth and establish a share price for use in acquisitions. Those are all the things that companies traditionally got from an IPO. Much has already been written about these types of deals, but with two huge ones happening it seems timely to think a bit more about them.
These deals should really be a wake-up call to politicians and regulators. They are a great example of how well-intentioned regulations can backfire. The net result of the Wall Street research settlement, SARBOX and other protections for small investors has been: small investors now have no access to the most interesting investment opportunities. Instead, these companies are going to be more or less fully developed by the time they eventually come to the public markets, with most of the upside having been captured by private investors. That’s especially annoying when it seems that with the Internet we should be seeing IPO 2.0 — direct to small investors without the historic flip opportunity for well connected investors.
These deals also serve as a powerful reminder of macroeconomic conditions and the microeconomics of Internet businesses. Despite some overall progress, the Internet is really the only sector, at least in the US, with a huge growth story. Fixed income certainly doesn’t provide an attractive investment opportunity with US Government yields of less than 3% for anything under 10 years. So it’s not surprising that there is a huge amount of money sloshing around and chasing the Internet opportunity. Within that opportunity it is now clear that — at least for consumer facing businesses — there are “winner-take-all” or “power law” type economics at work, with the #1 company often being 10x more valuable than the #2, which in turn is often 10x more valuable than anybody else.
Finally, any private company that is in a leadership position in its space would do well to make use of this fundraising environment while it lasts. These deals are beginning to look like the Internet IPOs of the bubble for another reason: At valuations in the many billions, there is little room for error. If a couple of these wind up imploding it will take much of late stage financing out for some time.