In mid-May, LinkedIn launched an IPO in the United States. By the end of the first day of trading, the share price had doubled, leaving pundits to believe that the tech market is being revitalised. Could this have implications for us in the region?
On 19 May, LinkedIn, the popular professional networking site, launched an Initial Public Offer (IPO) on the New York Stock Exchange (NYSE) to sell 7.8 million shares. Prior to the launch, the company had priced it shares at USD 45.00 per share. By the end of the first day of trading, the share price had jumped to USD 94.00 per share, and the company was worth USD 8.9 billion.
The LinkedIn IPO has been the biggest opening of a tech company since Google‘s in 2004. At the end of the first day of trading, having offered 19.6 million shares, Google was valued at over USD 23 billion. However, LinkedIn is also the first social networking site to go public (in the US) and the first based on web 2.0 to be worth billions of dollars.
Even at the time of the Google IPO, there was a sense that the tech market was still plagued by the fallout from the dotcom bubble of 1995–2000. During that time, stock prices were spectacularly high, and investors were confident that web-based ventures would be profitable, regardless what the outcomes of standard business analysis might indicate. In a nutshell, tech businesses were seen as excellent investments. However, with every boom, there is a bust. The dotcom collapse was driven by among other things, unfettered spending, untenable business models, and the slowing down of the US economy due to increasing interest rates.
Thanks to the collapse of the dotcom bubble, investors have been wary of tech stocks. Although some tech businesses might be well-known and widely used, e.g. Amazon and Google, they often do not report a profit prior to their IPOs. As a result, their IPO launch can be less than impressive. However, although LinkedIn is yet to be profitable, its IPO is being seen by experts as heralding the revitalisation of the tech market, especially with respect to social media and Internet companies. Within the coming year, a number of other companies are expected to launch IPOs, such as Facebook, Groupon, Pandora, Kayak and Zynga. Pundits are optimistic that the LinkedIn success is just the first of many to come.
However, what could LinkedIn’s success mean for tech markets in the region?
Although we have nowhere as large or as vibrant stock markets as the US, there could be some positive effects on tech businesses, especially start-ups, in the Caribbean.
1. A shot in the arm for all techies and tech businesses. For those who have dedicated themselves to success in the IT/ICT field across the Caribbean, LinkedIn’s lucrative first day on the NYSE should be seen as a validation of the commitment and sacrifices that have been made. Although none of us might own a single share in LinkedIn, we can all be encouraged by what it has achieved.
2. Potential for more investment. One of the biggest issues that most start-ups experience is the need for capital, either to allow the business to continue operating, or to facilitate its expansion. Investors may now be more receptive to tech businesses, thus providing an alternative to commercial banks for funding. There might also be increased scope for venture capital and angel funding, especially from outside the region, to support original ideas that have the potential to take off and become lucrative.
3. Greater government support. Countries in the Caribbean are still recovering from the global financial crisis. They are trying to find ways to rebuild their economies, and to varying degrees, are focusing on ICT as a driver of their economic and social development. To that end, the success of LinkedIn’s IPO could begin to signal to governments in the region the value tech businesses can offer.
However, integral to increasing their ICT readiness and global competitiveness, Caribbean countries must provide a more conducive environment for business generation and development. Further, since most of them are hoping for increased investment in ICTs, it is important that they are more supportive of efforts in that sector. Hence, with a bit of prodding, and with the anticipated attention on other upcoming tech IPOs in the US, greater government support for local tech businesses could be realised.
Finally, on an aside: recent trends and expert opinions suggest that, going forward, investors might be more keen to invest in projects that
- are based in social media, or
- fully take advantage of social networking features and capabilities, or
- already have a vibrant following, or are built around growing an audience, which can be leveraged into sales, or which the business can otherwise influence.
These features speak not only to the venture’s popularity, but also to the value of the services offered, and the potential to generate revenue. However, having thousands of friends or followers does not, on its own, guarantee success. It may be more important for the business to have active engagement with its followers, and of course have a standout business idea that adds value.
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One cannot but think this is another balooning dotcom bubble. Reason being that the revenues for these companies do not dovetail with the market value they assume.
Facebook value $50 billion; revenues less than $800 million. Compare with Boeing: value $55 billion; revenues over $60 billion.
You do have valid point. However, recent reports in the trade publications suggest that companies will perhaps be more conservative in the number of shares that they release for public sale, i.e. taking a leaf out of LinkedIn’s playbook.
While this approach might initially inflate share price, I do sense that the IPOs will not be as gratuitous or as mercenary as they have been in the past. So along that vein, management for several of the companies appear wants to maintain a certain amount of control of the business; they want to build the business; and be around for the long haul…