Hi. While this blog is a part of Seed Catalyst’s website, I realised over the initial few weeks that a lot of you are first introduced to the firm via the blog rather than our home page.
So to introduce myself - I’m a business consultant working with early stage technology firms to help streamline their strategy and go-to-market approach and support them for fund raising.
With this blog, I aim to capture key market trends that I see in the industry, the ecosystem and cross-plays in some of the more interesting and upcoming sectors, as well as cover interesting companies that I meet.
I will also be addressing vexing and interesting valuation and deal/term-sheet structures that would be of interest to technology start-ups at various stages of their growth.
I’d be amiss if I don’t take note of the LinkedIn IPO on Wednesday. Stellar is an understatement.
The question is: Are we seeing a bubble or is there just too much money in the market that investors don’t know what to do with?
First the facts: The IPO was for 7.84 million Class A common stock, 4.8 million new shares and 3 million from existing shareholders. The firm continues to hold 86.7 million Class B common stock which has voting rights of 10:1 as compared to 1:1 for the Class A stock. The stock opened at $85 and by mid-day it was trading at a peak of $122.7. At end of day, the stock was at 94.25 with a market cap of $8.9B.
As of March 2011, the firm had 102 million registered members. Revenues have grown from $78.7 million in 2008 to $243 million in 2010. The firm has moved from making losses to a profit of $15.4 million in 2010.
So, here we have a few multiples:
P/R: 36.7x
P/E: 578x
P/member: 87.4x
The question is - when it comes to social networking sites, what do you monitor? No. of page views, no. of clicks, no. of members? I know LinkedIn isn’t exactly Facebook or Renren since it even has paying members. Revenues may come from advertising but the focus is on providing recruiting and other related corporate solutions. In such a case, P/E and P/member taken in conjunction may be the right monitor.
Source: SEC Filing
So that means 578x and 87x – phew!! And that too for a firm with a free float of 8% and voting rights of 0.1%! Perhaps it is because it’s only a freefloat of 8% - low supply greater demand.
I was looking at some numbers for LinkedIn according to SharesPost. At the end of March, 2011, the company was being valued at $2.4B with a per share price of $30.8.
3.5 times in 2 months. Does seem a bit of a bubble, doesn’t it?
Now, is it just excess money in the markets. We've all heard enough about the impact of quantitative easing on markets and the trillions which are raising the prices of commodities world wide and causing inflation in emerging markets. Is it relevant in this case?
Investing in the US has certainly come back into fashion since September last year. Both the S&P and NASDAQ have risen by almost 25-30% with the NASDAQ outperforming by about 5%.
This may explain part of the excitement related to the IPO. At the same time, let’s also take a look at the iShares S&P 500 Growth (IVW) vs Value Index (IVE).
Once again since September, we see a 5-8% out-performance of growth stocks as compared to value stocks.
I guess it’s fair to say that the market is looking for interesting growth stories and they certainly don’t come better than the LinkedIn types. $250 million in revenues, 40% growth, profitable.....it's not just a dotcom story.
So, is it a bubble? Right now, I do think so but we should certainly see the numbers settle down lower. However I still think it will stay higher than it’s IPO list price (going out on a bit of a limb aren’t I?)
