LinkedIn and the Downside of an IPO

The world is abuzz, aflutter and agog about LinkedIn’s IPO, which saw the price of its shares more than double to $94 from the offering price of $42. LinkedIn is now worth a staggering $8.9-billion, or 40X revenue.

To some people, the LinkedIn IPO harkens back to the original dot-com boom when valuations were sky-high and investors were completely irrational. That may be true but remember most of the IPOs done a decade ago were crappy companies with little or no revenue that played upon the bubbly enthusiasm of this new thing called the Internet. LinkedIn, on the other hand, has revenue, 100 million users and a global brand name. In other words, it has fairly strong fundamentals.

But as people sober up from LinkedIn’s spectacular debut yesterday, here are a few thoughts:

1. The biggest thing about being a publicly-traded company is everything you do is on the table. There are no secrets anymore that can kept behind the scenes like when you’re privately-owned or VC-backed.

At the same time, there are expectations to meet from investors and analysts looking for certain finance results. If you exceed targets, you’re rewarded; if not, you’re penalized. For publicly-traded companies, it puts pressure on them to perform, and may get them to do things such as raise prices or introduce new services to drive revenue.

2. While LinkedIn had strong revenue ($243.1-million), I think companies that don’t have strong revenue will have a more difficult time doing an IPO unless they also have a compelling brand. Facebook could do an IPO in a heartbeat, and I think the enthusiasm among investors would dwarf LinkedIn’s.

Twitter could easily do an IPO based on its user base and brand recognition. The only problem is Twitter’s financial fundamentals may be an issue because it’s still not generating enough revenue. This explains some of the strategic decisions Twitter has made recently.

3. There will likely be a flurry of IPOs as entrepreneurs and, as important, VCs try to take advantage of the LinkedIn IPO to pull some money off the table. My advice to investors is to be pragmatic and careful, and be prepared to get stung if you’re not prepared.

More: The New York Times has a good piece on LinkedIn’s IPO with a great first paragraph: “It’s not 1999, but the big Internet I.P.O. is back.”

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