Walter Sobchak: Has the whole world gone crazy? Am I the only one around here who gives a shit about the rules? Mark it zero!
- The Big Lebowski (1998)
Yelp may have just turned down a half-billion dollar takeover offer from Google (NASDAQ:GOOG). Zynga does a crazy-big $180 million funding round. Not long ago, Twitter took another $100 million in financing, and now we learn it’s … profitable. In the immortal words of Walter Sobchak, has the whole world – or least every young and fast-growing technology company -- gone crazy?
Maybe, but there could also be something important going on. It’s been so long since it last happened that most people will have forgotten, but there is often a reason why companies start doing strange things, like taking lots of money when they don’t need it, and like turning down appealing acquisitions. The reason? This thing called an “initial public offering” (IPO).
Remember IPOs? Way back when your parents were messing about with technology stocks in the late 1990s, pretty much every company that could went public, mostly via Nasdaq IPOs. While many companies were bought rather than going public, we had a giddy and appealing period (for companies and their venture investors, as well as for some friends of Frank Quattrone) where you could make a ton of money selling your company’s stock in the public market. You didn’t need profits, nor did you need professional management, per se. You just had to be in technology, be willing to be listed, and voila, an eager investment banker would track you down and take you public.
I’m wagering we’re about to enter a similar period in 2010. The last one was initiated by the Netscape IPO, one of the first commercial browser makers. Its IPO, less than two years after the company was founded, triggered an avalanche of similar offerings, and thus helped cause the dot-com episode that characterized the market’s madness of the late-1990s. All it would take to make it happen again is another Netscape moment, as it were.
And what is a Netscape moment? It’s not just a moonshot IPO from a fast-growing company with all the right moves. It’s also a company that represents a cohort of IPO-able fast-growers, any one of which bankers can track down and take public once the initial companies are successfully public. “Get me another one of those!”, is what investors (and bank executives) will say to investment bankers after the first company in the cohort goes public. And bankers can be criticized for many things, but being slow to follow profitable orders is not one of them.
It also helps if the companies represent a credible wave that investors can extrapolate to some giddy future. The biotech IPO boom was boosted twenty years ago by the belief that all those companies were going to cure cancer and make us live forever; the Internet IPO boom was driven by the belief that our lives would never be the same after the Net. This newest IPO boom (including some that should, in Walter Sobchak’s words, be marked zero) will likely be driven by a belief that the new ways we connect and communicate and play – social networks and mobile and games (and all of them together) – will change forever the ways money and time get spent worldwide.
It may start with Twitter, or Facebook, or Zynga (or even Yelp), but an IPO wave is coming and all it requires is a Netscape moment. And when it happens, expect all these implausible recent financial events – from Yelp allegedly turning down a Google acquisition, to investors competing to put money into companies that don’t need more money – to make much more sense. There was another suitor for these companies, and that suitor was us. We just didn’t know it yet.