If Zynga, Facebook and Groupon Are Worth Billions, Why So Few IPOs?


Privately held Zynga is reportedly chatting it up with potential investors about a $500 million funding round that would put the social gaming company's valuation around $10 billion, according to a Wall Street Journalarticle. Plus, multibillion-dollar valuations are being bandied about for social networking giant Facebook and coupon clippers' delight Groupon.

Investment bank JPMorgan is reportedly pulling together an investment fund to throw more money at privately held digital media and Internet companies that are mature -- or at least generating steady revenues and cash flow -- The Wall Street Journal reported this week. And Goldman Sachs recently jumped into a Facebook investment.

But analysts who track IPOs and venture capital say these things don't necessarily mean other social media companies will pull the IPO trigger prematurely just to ride on the coattails of these hot sector darlings, nor that investors will hop aboard such deals if they become available.

"There may be some pressure from VCs to file an IPO, but by and large, people are wiser these days," says Mark Heesen, president of the National Venture Capital Association. "Hopefully, the VCs have learned from the Internet bubble of 1999 and 2000 that if you take a company public too early, they fail."

Digital Media Companies Hold Back

Last year, venture capitalists poured $21.8 billion into private companies, a 19% increase from the year before, according to the MoneyTree Report from the National Venture Capital Association and PricewaterhouseCoopers. And the number of deals jumped 12% to 3,277, a notable increase. The double-digit increase in investments marked the first time the annual investment level increased since 2007, according the report.

The spike in investments into Internet companies was significantly higher than the the average: VCs put $3.78 billion into Internet companies, a 28% increase over 2009. And the number of deals they funded reached 729, a 14% leap over the previous period.

The number of IPOs is also on the rise, and if the pace hasn't returned to the hectic level of the Internet bubble era, it's at least far better than the hibernation conditions that prevailed during slowdown that followed it, or during the recent downturn, according to IPO research firm Renaissance Capital of Greenwich, Conn.

"There is a lot of demand in the market for companies in the digital media and Internet sectors but not a lot of supply," says Paul Bard, vice president of Renaissance Capital.

Renaissance is currently tracking 126 companies that have filed their registration papers to go public: Of this group, less than half a dozen are in the new media sector. Some that have filed for an IPO recently are social networking site LinkedIn -- whose IPO investors have been awaiting for years -- Internet radio site Pandora, online travel research site Kayak and online local advertising network company Reply.com, Bard says.

But the true test of the demand for their shares won't be evident until LinkedIn, for example, goes public. Bard notes: "The LinkedIn IPO will show investors if the public market is receptive to these kinds of businesses."

As valuations in long-awaited IPO prospects like Facebook and LinkedIn reach into the billions of dollars even before they go public, the potential for retail investors to grab some of that upside once they debut may be reduced, Bard adds.

And if that weaker performance causes investors' attitudes to sour some of those closely watched IPOs, that it could have a negative effect on the IPOs waiting in the wings.

Although the stock market has stabilized and investors are starting to put their toes in the water for IPOs, they aren't going gaga over just anything that moves in the Internet sector, Heesen says.

"Investors are done licking their [post-bubble] wounds, but they're not running into the market," he says. "In a couple more months of a stable economy and stock market, they'll be more willingness for them to jump in."