At this week’s Cloudbeat Conference in Silicon Valley, I met up with a CEO of a tech company that has filed to go public (I can’t name him because of the “quiet period”). Interestingly, he said that it would be “crazy” to go public right now. He pointed out that the volatility premium for tech deals is a steep 50% — and then there is the extra 15% discount to create a first-day stock pop.
His conclusion: If a company is going public now, it’s either desperate to get money or the insiders want to cash out.
It’s definitely a provocative view, but it has some merit. To remain competitive in today’s global markets, it’s critically important to have a nice trove of capital. At the same time, who doesn’t want to cash out and get some liquidity?
This dynamic may be at play with Zynga, which plans to go public on Dec. 15. To gear up for its deal, the company filed an amended S-1 with the Securities and Exchange Commission to set the price range at $8.50-$10 a share, with 100 million shares expected to be issued. This comes to 14.3% of the outstanding shares, which is much higher than other recent IPOs. Groupon (Nasdaq:GRPN), for example, issued only 5.5%.
Assuming the Zynga deal gets done at the top of the range, the valuation will be $9 billion. But remember that back in July, the valuation of the company was estimated at a frothy $24 billion. So, it does looks like Wall Street is extracting a “pound of flesh” from tech deals.
As for cashouts, Zynga’s venture capital backers certainly want to see some return on their investments. Institutional Venture Partners, Union Square Ventures, Foundry Group and Avalon Ventures plan to take 7% of their holdings off the table. But this depends on whether the over-allotment option is exercised. (This is an additional amount of shares that the underwriters will sell if there is more demand. And usually, they exercise it).
Zynga’s senior executives, however, are holding on to their stock. Then again, they probably have no choice as it would concern investors if there was an concerted dumping of shares.
On the other hand, when the lock-up period expires in 6 months, it seems inevitable that they will take money off the table, which has happened with several other new dot-coms, like LinkedIn (NYSE:LNKD).