L026: Tech IPOs Are a Bust -- and Why That's Awesome!

By Jason Calacanis

The IPO market for tech companies in web 1.0 was a disaster for the public because the companies failed to become businesses half the time. In fact, they went public so early they were a riskier buy than the incoming class at Y Combinator or TechStars (really).  

The current tech IPO market -- let's call it IPO 2.0 -- has turned out to be a disaster for retail  (a.k.a. public) investors for the opposite reason: these companies are too successful.

So successful is this crop of companies that their potential gains over the next couple of years have already been priced into the stocks.

Smart trades in LinkedIn, for example, occurred between 2009 and 2010 on SecondMarket, not on the stock market for the past couple of weeks.

If you bought this amazing, amazing company -- which we love -- in the private market last spring, you got in at a billion-dollar market cap. That means you could have locked in as much as a 10x gain on IPO day.

However, buying LinkedIn on the public markets means you're going to need to park your money for four years before you see that investment start to grow. The mini-frenzy that occurred, based on the small float and we're certain some good-old consumer speculation, has been dealt a cold, cold hand.

LinkedIn's $124 peak price has crashed almost in half, closing at $68 yesterday. Boingo didn't pop and headed south after its IPO in early May. Demand Media has been brutally cut from its $27 peak to as low as $12.

Renren is in free fall, from $24 to -- gulp -- $6.

Pandora: Awesome service! Killer team! Disastrous IPO. The share price dropped from $16 to $13 (-24%) by the second day of trading.

Tech IPOs are a huge bust... and thank God!

Given the continuing cratering of the real estate market, you might have better returns buying condos in Vegas than tech IPO stocks -- plus you get to live in the condo during the World Series of Poker (we’re just sayin').

Think about it, in order for Facebook to be worth $80B it would really need to have, how much, $10B in revenue this year -- not $5B. And with 700M members we're left wondering who’s left on the wired planet?

Facebook is going to be a juggernaut for some time to come, but if you buy it at the IPO, when it will trade at a $150B market cap on the first day (we predict), you might be sideways for a long, long time.

Our industry should be thankful that the IPO market is open for business -- but not on fire. Fire is really awesome when it's at the back of the rocket, but rocket fuel is dangerous, and when fire engulfs the rocket it's not fun.

Nothing could be better than the crop of IPO 2.0 companies going exactly sideways, or slightly up or down, for the next couple of years.

If there’s no "pop," and sometimes a drop, we'll avoid another wipe-out of dentists' and retiree life savings.

IPO 2.0 companies are getting liquidity and a currency for M&A, but they'll save themselves from the bogus lawsuits of gambling individuals who think just because they bought a couple of Groupons, or their cousin got a job off LinkedIn, that they are now qualified to go up against the Ferengi traders at Goldman Sachs.

Stay away consumers, stay away! Take thy money to Vegas and put it on black. There is no upside for you here in tech land!

Secondary markets have sucked all the life out of the public markets, putting fears of IPO bubble speculation to rest. This is a good thing for our industry.

Liquidity without the lawsuits: keep those S-1s coming, Goldman.


This Week in Startups Episode #148: IPO Special with Jon Avina and Henry Blodget

Pandora I.P.O. Underwriters Got It Right (Sort Of)

Boingo Wireless CEO On ‘Challenging’ IPO Market And Carrier Partnerships

#16: Be careful what you exit for.