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    Entries in private companies (2)

    Monday
    Jan032011

    The Return of the IPO

    Investments: Episode 51

    Facebook raised another $500 million and looks to be on a course for IPO in the next year or so.

    The market for initial public offerings (IPOs) has been anemic since the dot-com bubble burst in the early 2000s. But venture capital and angel investment has been very robust over the last five years. Eventually those investors are going to want to realize their gains.

    IPOs serve three main purposes:

    1. To raise additional capital to fund the cash needs of the business.
    2. To facilitate liquidity of existing investors.
    3. To create a form of currency, in shares, for acquisitions.

    It's highly unlikely that Facebook needs the cash at this point. With over half a billion eyeballs viewing the ads it serves up they are almost certainly raking in tons of cash. And that cash makes acquisition relatively easy for all but the largest of targets.

    Facebook's maneuvers are most likely aimed at facilitating liquidity. All those billions in valuation are worthless until they are turned into cash. 

     

    Thursday
    Dec162010

    Valuation

    Investments: Episode 49

    Last night I started a conversation on Twitter and Facebook about Twitter’s valuation. Twitter raised another round of venture capital which put the company’s value at $3.7B. I Thought it was funny that Twitter is valued at $3.7B while Groupon turned down an offer of $6B from Google.

    Thanks to ZFarls (@MaddenBible) and Terran Birrell (@TerranB) for riffing with me on Twitter. And also thanks to Michael Durwin and Eric Guerin for joining the conversation on Facebook.

    Back in episode 18 I discussed how equity analysts come up with their price targets using Apple as an example.

    Price is another word for valuation. What is the stock, which represents ownership of a company, worth?

    There are two types of valuation: Buy Side and Sell Side. In stock parlance you often see Bid and Ask. What is someone offering to pay and what are you asking?

    In Twitter’s case, the company needed to raise more capital and investors bought roughly 5.4% of the company for $200M which implies that Twitter as a whole is worth $3.7B or just under 20 x $200M.

    Is Twitter worth it? Time will tell. They are only now beginning to monetize. Groupon however already has $100Ms in sales. 

    Valuing potential revenue or actual revenue? Who do you think has more potential in the long run? Is Groupon’s market position defensible? 

    What if Google decides to compete and use its $6B to do so? It already has millions of vendors buying Adwords and millions of sites using Adsense. Distribution wins. 

    In the end we’ll have to wait for both to go public or be sold to know their true value.