November 14, 2013

Twitter IPO success paves way for pack of startups

Not profitable? So what? Eking by on ad revenues? Who cares? If Twitter can do it, so can they.

The Associated Press

SAN FRANCISCO — Just as one high-tech breakthrough often paves the way for the next big thing, technology IPOs move in virtuous cycles, too.

click image to enlarge

Cars pass Twitter headquarters in San Francisco. The success last week of Twitter’s IPO provided a springboard for a new wave of potentially hot IPOS by trendy online services.

The Associated Press

Twitter’s scintillating stock market debut punctuated a procession of highly anticipated coming-out parties over the past 2½ years, providing a springboard for a new generation of rapidly growing startups to make the leap to Wall Street.

The next wave of potentially hot IPOs includes trendy services such as AirBnB, Square, Spotify, Dropbox, Uber, Snapchat, Pinterest, Box, Scribd, Flipboard and King.com. Most of their services are tailor-made for smartphones and tablets, a crucial characteristic that helped feed the rabid demand for Twitter’s stock in its initial public offering last week.

Despite the short-messaging service’s unprofitable history, Twitter is now worth about $29 billion – a valuation that has enriched its founders, employees and early investors.

“Twitter just made it clear that the IPO window is open and a lot of success can be had,” says Ira Rosner, an attorney and shareholder for Greenberg Traurig, a law firm that helps prepare companies for IPOs.

Other startups – and the venture capitalists who provide them with rounds of funding – will be angling for similar windfalls by filing their own plans to go public over the next two years, Rosner believes.

“There is no question that a successful offering encourages other offerings,” he says. “It gets people excited and it creates buzz.”

GOOD VIBES ON WALL STREET

Even before Twitter’s IPO, good vibes were rippling through the stock market as the Dow Jones industrial average and Standard & Poor’s 500 indexes repeatedly set new highs. The fertile conditions have produced 199 IPOs in the U.S. this year, according to the research firm Renaissance Capital. At the current pace, 2013 is on track to be the biggest year for IPOs in a decade.

Sentiment among venture capitalists is also strong – the highest since 2007 according to a survey by Mark Cannice, a University of San Francisco professor of entrepreneurship who polls Silicon Valley financiers every three months.

The companies generating the most interest from venture capitalists include Uber, the provider of on-demand car services that received $258 million so far this year and Pinterest, which nabbed $425 million. Pinterest’s latest round of financing, for $225 million, valued the popular online pinboard service at nearly $4 billion. The San Francisco company just recently began trying to generate revenue, which means it could be several years before it becomes profitable. Snapchat, meanwhile, recently turned down a $3 billion buyout offer from Facebook, according to a Wall Street Journal report citing anonymous people briefed on the matter. The report also said China’s Tencent Holdings had offered to invest in the company at a $4 billion valuation. A Snapchat representative did not immediately return a message for comment Wednesday.

“The market is signaling that it is very receptive again to these young, high-growth social media Internet companies,” says Tim Loughran, finance professor at the University of Notre Dame in Indiana. Twitter’s successful IPO even proved that it’s irrelevant whether companies are profitable, he says.

A string of IPOs that began with the May 2011 debut of professional network LinkedIn Corp. helped fuel investors’ interest in rapidly growing Internet companies. Other online services with large audiences followed LinkedIn into the public stock market, including online review site Yelp Inc., Internet radio station Pandora Media Inc., daily deal maker Groupon Inc., online game maker Zynga Inc. and social networking leader Facebook Inc.

Groupon and Zynga have been duds so far, largely because they didn’t adjust quickly enough to shifting conditions in their respective markets, but all the others are trading above their IPO prices. LinkedIn and Yelp have more than quadrupled from their IPO prices, making the stocks star performers among the group.

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