Internet companies are pushing smaller portions of their equity onto public markets at a volatile time and still seeing stock values increase almost instantaneously. For now, the practice is helping tack bigger price tags onto VCs’ assets, but if and when a major market disruption occurs, these newly-listed darlings may later see secondary offering attempts flounder.
Low-float IPOs are all the rage right now, and LinkedIn’s limited offering (less than 10% of its equity) helped set off a bidding war for its stock that drove share prices through the roof instantaneously. Immediately, imitators followed. Last week, it happened with Fusion-io. Pandora, which is soon expected to begin trading, is selling less than nine percent of its equity, and has continually marked its shares up since February. Then, last week, Bloomberg quoted a source saying Zynga, too, would sell only a small portion of shares in its IPO, as well.
Sliver IPOs serve two purposes to the entrepreneurs and VCs that issue them. First, it allows the existing management structure to maintain similar control over the organization to what they had pre-IPO, while still allowing it to raise fresh capital. Further, through a low float, they have the opportunity to drive up share price through exclusivity and hype, something that has so far worked to the advantage of LinkedIn and Fusion-io.
Building on their early stock price leaps, later, “you do a secondary offering later at a higher price,” says Lise Buyer, Principal and Founder at Class V Group and one of the architects of Google’s 2004 Dutch auction IPO. “It’s a better move when you’re a well-recognized company,” she adds. Eventually, Buyer said, other sellers will bring their shares to market after the standard 180-day lockup has expired, piecemeal, so as to prevent share prices from falling as supply broadens.
What about Groupon? Well, the IPO seems to be the only offering lately where the founders and initial investors haven’t been eager to take cash off the table through an additional equity issuance. Groupon, too, is expected to go public with a low float.
In fact, VC-backed Internet companies that filed ambitious IPO plans in recent weeks have watched as prospective public entities from other industries instead opted to shelve offering plans, citing “market conditions.” More to the point, with markets heading downward, investors are unsure what condition their assets would be in months after the IPO.
Anything below 10% or 15% is considered a low float, Buyer said, but more than the portion, the value of the stock being sold is what makes a sliver sale. This, she said, is what would make a Groupon IPO not technically a low float—because it’s going to be absolutely enormous at $750 million. And, of course, this still precedes any possible hikes in the amount of stock to be sold, or its price. Groupon’s next fundraise may, like, actually be for $1 billion—or more, even as the din of critics’ chorus begins to grow. But investors shouldn’t be as concerned with the volume and the pricing of the current issuance; they need to evaluate where Groupon’s—as well as the stock of other newly-public Internet stars—shares will be at the point its secondary offering comes.