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The Real Winners of 2013: Tech IPOs from 2012

This morning I posted an article on Fortune.com entitled “The Real Winners of 2013: Tech IPOs from 2012.” Ted Tobiason (@TedTobiasonDB) and the team from Deutsche Bank helped us pull together some astonishing stats about the IPO Class of 2012, starting with the fact that the average tech IPO from 2012 is up 170%. You can read the article at Fortune.com or below. 

The year 2013 was a banner year for venture-backed technology IPOs. According to the National Venture Capital Association (NVCA), 82 VC-backed companies raised $11.25 billion in IPOs in 2013, the most VC-backed IPOs since 2007. Public market investors showed strong interest in many of these offerings at IPO as well as afterward – the average IPO from this class had traded up 64% through the end of the year (and 15 were up more than 100%).

Fig 1 IPO Trend

Impressive numbers for the Class of 2013 by any measure. It is worth noting that 2013’s numbers were significantly up from 2012 in both number and dollar volume if Facebook (which accounted for $16 billion of 2012’s total of $21.5 billion) is excluded from the 2012 numbers (as shown in the chart above).

From the vantage point of venture capitalists, founders and employees of these tech companies, however, the most important measure of a company’s IPO is how the stock is performing a year or two down the road. The reason for this is simple – most VC’s and employees aren’t selling at the IPO. The standard lockup (a window in time where insiders cannot sell shares) is typically 6 months, and many insiders and employees will wait (or vest) and sell down their positions over time. Performance beyond the first year is also critical for the health of the overall IPO market, as public market investors who bought into high performing IPOs are often inclined to support additional offerings over time (in other words, the Class of 2012 is an important leading indicator for 2014 and beyond).

So for technology investors (and the pension plans, endowments and individuals that invest with them) and employees, the important question to ask is “How is the IPO Class of 2012 doing?”

The short answer – unbelievably well. To the tune of over $100 billion of market capitalization increase since IPO. To look deeper, I reached out to Ted Tobiason, Managing Director at Deutsche Bank, whose team helped craft the following data points (all data as of 1/2/2014):

–          The average tech IPO from 2012 is up an astonishing 170% from its offering price

–          18 of 42 tech IPOs from 2012 are up over 100% from their offering price, while just 9 trade below their offer price and 4 have been acquired (Acquity, Eloqua, ExactTarget and Kayak)

–          The IPO Class of 2012 has added more than $111 billion of market capitalization since IPO ($57 billion by Facebook, $54 billion by all other IPOs combined)

–          Here are the top 10 performers from the IPO Class of 2012, ranked by percentage increase from the IPO offering price to January 2nd, 2014 (market close last week):

Fig 2 IPO Top 10 Class of 2012

(Note that this data reflects an analysis for 42 of the 49 IPOs from 2012, as the NVCA data also includes biotech IPOs, while our analysis does not.)

While IPOs from high-profile companies like Facebook get the bulk of media attention, an astonishing amount of value has been created broadly by the IPO Class of 2012 over the past two years. In fact, more value has been created by these companies since IPO than was created prior to IPO: the $54 billion referenced above is up from a starting point (at IPO) of $33 billion.

So – what conclusions can we take away from these data points? To be fair, they have to be taken in the context of an overall bull market which saw the NASDAQ Composite rise 56% and the Dow 34% from the beginning of 2012 to the end of 2013. Nonetheless:

1)      Public market investors are clearly showing a massive appetite for new offerings and the growth rates that typically come with them; the average IPO from 2012 and 2013 was growing at 44% in the calendar year of its IPO

2)      The Class of 2012 performance is not just driven by a few outliers; though the top 10 drive up the average (mean) performance considerably (to 170%), the median for the Class is an impressive 84%

3)      Pricing at the time of IPO is often considered an indicator of the “hotness” of an IPO, but may not be a great indicator of future performance; all 5 of the top performers from the Class of 2012 priced below the midpoint of their IPO filing range

It will be interesting to see how the Class of 2013 fares in 2014, when lockups expire and early shareholders and employees can begin to sell their holdings.

They’ve got big shoes to fill – the Class of 2012 has knocked it out of the park.

Disclosure: GGV Capital is an investor in YY. Related to this topic: why certain companies do well post-IPO; for more, see my Partner Glenn Solomon’s post “How LinkedIn Became a Wall Street Juggernaut.”

Congratulations to the team at YY

A big congratulations to our friends at portfolio company YY on their IPO!

Edit: Additional articles on the YY IPO:

PandoDaily: “YY Soars on Opening. Is the Curse of the Chinese IPO Over?”

Forbes: “Chinese Billionaire Sees Hundred Fold Return on YY IPO”

ChinaDaily: “Social Platform YY Breaks IPO Dry Spell in US”

Wired: “Facebook is All Smiles in China Now, But YY is Coming”


Not All “Venture Capitalists Turn Their Backs on China”

Saw this article in VentureBeat this morning: “As Venture Capitalists Turn Their Backs on China, Funding Dries Up.”

Spurred a few thoughts:

1) Good investors invest in good and bad markets.  They do their homework and focus on finding the best entrepreneurs even when the markets are cloudy.  We invested in Alibaba Group in the early 2000’s when most investors were scared to death of China, and it’s been one of the greatest venture investments of all time – anywhere.  We consistently put $100M+ to work each year in China and the US, and we will again this year.  We’ve been doing it for 12 years – consistently – and entrepreneurs know they can count on GGV to support them regardless of what the public markets are doing.

2) The bar has been raised.  In hot markets, VC’s can throw money at copycat concepts and weak businesses in hopes they can “flip” them to the next set of investors (note: this happens in all markets, not just China).  This never works over the long run.  The bar raises, and VC’s have to work hard to find the best companies.  I am of course biased, but I believe firms that have been investing locally in China for the long term will have an advantage.  They have seen up and down markets, have the strongest relationships with the best entrepreneurs, and have built the infrastructure and teams to do their homework and find the best companies.  I know my Partners at GGV – as well as many of our strongest, long-term competitors in the market – have never been more excited.

3) The trends don’t lie.  There are still 500 million Internet users in China.  Android and iOS are taking the mobile phone market – 1 billion strong – by storm.  Consumers are rapidly turning China into the #1 market for every luxury goods maker in the world – from Mercedes to Apple to Coach.  If you want disruption on a massive scale, there is no better market than China.  Entrepreneurs know it, and the long term VC’s know it.

4) There are risks.  I won’t go into all the details, but yes there are major risks to investing in China (as there are in any emerging market).  They include competitive, regulatory, legal, currency, etc.  Some of these risks are why investors have pulled back on China.  It can be scary to invest in a new market.  Local investors with local knowledge, local relationships and deep industry knowledge tend to win when markets get scary.  As the saying goes “the tourists go home.”

There are Chinese companies which went public in 2010 and 2011 which never should have.  They were subscale without long term, sustainable business models.  But that doesn’t mean all Chinese companies fit that profile.  Ever heard of Qunar, 360Buy or YY?  They are very real companies with very real business models and massive user bases.  As it has on the VC side, the bar has been raised for IPOs, and we think that is a good thing.

But make no mistake – despite the headline at VentureBeat – not all venture capitalists are turning their backs on China.  The long term investors are hunkering down, backing the best entrepreneurs, and looking forward to the challenges and opportunities ahead.

Disclosure: GGV is an investor in Qunar and YY.

GGV 2011 Year in Review: $700M / $4.5B / $100M+

Proud to share GGV Capital’s 2011 Year in Review (click here).  It was a terrific year for our portfolio companies and for our firm.  Another 5 IPOs (11 in the last 24 months) raising $700M, three companies exited for more than $4.5B (Endeca, SuccessFactors and the Baidu investment in Qunar), and north of $100M invested into 9 new companies.

We’re grateful to all of the entrepreneurs and management teams who work their butts off every day to make our investments valuable, and we couldn’t be more proud to be associated with their companies.

Looking forward to an even better 2012!


2011 YTD IPO Data

I did a bit of research on the US and Chinese IPO markets before my interview with Emily Chang on BloombergTV last week, and thought I would share the data here.  Special thanks to Mike Barker and my friends at investment bank Morgan Keegan for reviewing and fact-checking the data for me.  All data is accurate as of October 24th, 2011.

  1. The value of IPOs increased 14% to $114B in the first half of this year.  However, volume dropped considerably in Q3, with only $27.6B raised, putting us at 8% below last year’s total YTD.
  2. The average US market IPO is down 8% for the year, and 2/3 of listings are below their issue price.  Some are down as much as 60%.  (NOTE: many tech IPOs experienced a strong October, especially towards the end of the month, and the bulk of these companies are also beating analyst estimates handily)
  3. There were 178 IPOs in the US in 2010.  38, or roughly 21% of these, were by Chinese companies.
  4. The Chinese domestic market saw 345 IPOs in 2010, raising $71B.  There have been 232 YTD 2011.
  5. Chinese companies (by nationality, not exchange) have accounted for 31% of global IPO value this year, vs 21% for the US.
  6. As of the beginning of October, there were 166 companies on file in the US.  78 deals have been pulled or delayed YTD.
  7. Pre-Internet bubble (late 90’s), there were on average 300-500 IPOs per year in the US.  Post (2001-2009), we’ve seen on average 125 per year.
  8. VC investment in China hit $3.4B in Q3 2011, a record.  By contrast, US VC investment for the quarter was $8.4B.  1/3 of the VC funding in China went to Internet companies, vs 1/6 in the US.



Rare Air (A Discussion with Blackstone’s Eric McAlpine on Tech Valuations)

I had lunch a few weeks ago with Eric McAlpine, a Managing Director and co-founder of  Blackstone’s Technology Advisory Group based in Menlo Park, CA (we share the same building on Sand Hill Rd.).  Eric is focused on advising public and private technology companies on M&A and capital raising, so he sees a ton of great companies.

We got to talking about what drives ultimate valuation – in the public markets and in M&A scenarios, and Eric showed me a presentation he often uses with clients with an analysis of technology IPOs from the beginning of 2010 through present.  I particularly liked Eric’s explanation of what he calls “Rare Air,” and I like it for the same reason I like Bill Gurley’s post a few months ago titled “All Revenue is Not Created Equal” – it simply and succinctly explains why certain companies are valued more highly than others in an IPO and over the long run as public companies.  I’ve got a screen shot of Eric’s “Rare Air” slide below, and you can view the whole presentation on SlideShare (click here).

JR: Love the presentation and the concept of “Rare Air” – can you explain it in layman’s terms?

EM: It’s pretty simple.  Valuation in Tech is driven by growth.  Approximately 80% of public sector valuation revenue multiples can be attributed to a company’s growth rate and there’s an over 90% correlation between earnings multiples and earnings growth.  Beyond growth, important factors are things like sector leadership, long term margins at scale, and operating history.  One of the reasons we are seeing companies in the Internet space come to market with “Rare Air” valuations – LinkedIn is the best example, while Pandora and FusionIO are “Knocking on the Door” and Zynga and Groupon are in the wings – is they have a very solid mix of these basic components – though both Zynga and Groupon have shorter operating histories than LinkedIn and Pandora.  There’s also a great deal of scarcity value – there aren’t very many companies like this.  As a result, there is strong demand and they trade at a premium to their peers.  Combine this shortage with the fact that growth has slowed in the public markets for Tech to around 10% overall, while the median Tech IPO since 2010 is growing at a median of 26% year over year, and an average of 38% (sample size of 51).

JR: Talk about longevity.  Both LinkedIn and Pandora have been around for a while – 10+ years.

EM: Longevity builds an impression in investors’ minds that “these companies aren’t going anywhere.”  Both are companies that have been through both good markets and bad markets – and not only survived but thrived.  An institutional holder of the stock may see ups and downs, but these kinds of companies are unlikely to go out of business in 12 months.  Which sounds funny, but it did happen back in the 2000 bubble.  Could it happen again?  Longevity + track record lowers the risk profile.

JR: I guess a lot of people I speak with who can’t understand the valuations on these companies ask “But they’re not profitable?!?!?”  How do you respond to that?

EM: Amazon wasn’t profitable when it went public either.  And you’d loved to have bet the farm on that one 5 years ago (Amazon recently crossed $100B in market value).  The key is finding companies that can scale – and achieve a high level of profitability over time.  LinkedIn and Pandora are both doing more than $150M in annual revenue with growth rates of more than 100% annually.  Investors get comfortable with the valuations by doing a forward projection of how profitable these companies may be at scale – think $500M or $1B in annual revenue – or more.  Growing at 100% annually, it won’t take long to get there.  What are perhaps harder to understand are the private market valuations for companies with less than $100M in revenue and not a lot of longevity.  You can make the argument that the private market is way out in front of the public in terms of valuation and “rare air.”  Will we see “IPO downrounds” (where the company goes public at a valuation lower than its last private round)?  Could be interesting.

JR: What do companies you meet with do when they get your “Rare Air” chart?

EM: The first thing they do is plot themselves on the chart, of course.  It’s humbling.  There are a lot of great companies on that chart and it is not an easy feat to break out of “The Pack.”  It puts some very basic context around IPO and M&A valuations.

JR: What’s happening on the M&A front?

EM: I’d point to a few trends.  One, deals are taking a long time to get done.  Boards are increasingly cautious.  Two, larger cap players seem to be more interested in transformational deals versus programmatic expansion.  They’re willing to play big stakes poker and bet on a larger deal than play lots of hands at the small stakes table.  Look at the recent deals by Google for Motorola Mobility and Microsoft for Skype.  We aren’t seeing a ton of companies getting acquired after filing an S-1 either – which has often been a way to bring buyers to the table.  Third, in the Internet and Software sectors in particular, there just aren’t a lot of buyers.  We don’t have a ton of companies with $5-10B+ market caps and cash war chests.  That leaves a few large buyers, who don’t generally feel like they need to pay up for a rising star which will become a product line.  The deals you do see getting done are the big stakes poker deals – HP/Autonomy, Google/Motorola, Microsoft/Skype, etc.

JR: We’re certainly believers that there is a ton of opportunity for great companies to disrupt massive sectors – cloud, mobile and social come to mind – and are making bets accordingly.  You agree?

EM: Absolutely.  I think what you’re seeing is the market is already rewarding companies that are hugely disruptive with scale and high growth.  Facebook, Zynga, Twitter, Groupon, LivingSocial, Square, etc.  These are all companies being valued very highly in the private markets.

Since I interviewed Eric, a few of these companies – notably Groupon – have seen investors question the long-term viability and sustainability of their business model.  It will be interesting to see how they do over the next 3-5 years and whether they can sustain the “Rare Air” valuations given to them in the private markets.

Disclaimer: My firm, GGV Capital, is an investor in both Pandora and Square.


EDIT 10/19: Blog post picked up on Fortune/CNNMoney: Click here to read

Stormy Seas: Why IPO?

With last week’s IPO by Chinese Internet video company Tudou (disclosure: my firm, GGV Capital is an investor) and the previous week’s IPO by Carbonite, I”ve been asked by quite a few people “Why would a company go public in such a brutal market?”

It is indeed a very rough market.  Extremely volatile.  A lot of uncertainty around the world.  Huge concerns about the US economy and a lack of any real progress on employment in the last few years.  Investors are nervous.  Nervous investors make for rough markets.  At least ten IPO’s were pulled in the last two weeks.

So why are companies still going public?  And what about the companies that went public in the last few quarters and are now riding some very choppy seas (we’ve had 11 of our portfolio companies complete public offerings since January 2010, and it’s been a rough ride for many).

Here’s the short answer: going public is another mechanism for raising growth capital for good companies.  A company puts significant growth capital on its balance sheet and is able to begin establishing a track record with public market investors.  For existing shareholders and management who aren’t selling any shares in the offering, the price of the offering is important (because they incur dilution), but not as important as where the company’s stock is trading 12-36 months later.  And, as my partner Glenn Solomon pointed out in his excellent article in VentureBeat “Why Today’s Hot IPOs Aren’t Always Tomorrow’s Stock Market Darlings,” the near term price of an IPO has little to no correlation with where the stock trades in the future.

I remember when Rackspace (NASDAQ: RAX) went public in August of 2008.  There was no IPO market to speak of at all.  Zip/zero/zilch.  In fact, not a single venture-backed company had gone public the quarter before Rackspace began trading, and Rackspace ended up being the only venture-backed IPO within the March ’09 – March ’10 twelve month period.

RAX launched its IPO on August 7th, 2008, promptly “tanked” (Fortune’s words, not mine), and kept going down from there (you may recall, we had one of the largest global financial crises in history in the Fall of 2008).  As you can see from the chart below, it traded all the way down to $4.50.

But – the company put $187M on its balance sheet for growth.  And, it was an emerging market leader with great business fundamentals.  As you can see from the chart, RAX delivered for its shareholders quarter after quarter, eventually rising approximately 10X from its lows a mere 32 months later.  That’s right – shareholders who bought RAX at the lows made an unbelievable return, and even those who bought at the IPO price of $12.50 made 3X+ on their money (if they held).  RAX has traded down a bit in the past few months, but still sports a $4B market cap and is a recognized leader in the hosting and cloud computing industries.  Its employees, management and early shareholders have been generously rewarded.

Not every IPO becomes a Rackspace.  It takes phenomenal execution as a public company to grow revenue from $300M to more than $1B, as Rackspace has.

So – to answer the question – you go public in a choppy market because your business has strong fundamentals that investors will buy into regardless, you raise important growth capital, and begin establishing a track record as a public company.  Worry about the share price down the road.  The market typically rewards companies for great performance over time, and management, employees and shareholders benefit.

(Disclosure: I have owned shares of Rackspace in my personal account for several years, and GGV is a shareholder in Tudou)

Congrats to Josh and the Team at 21ViaNet

I tweeted this last week, but am adding to the blog a few days in delay: Congratulations to Josh and the team at 21ViaNet on last Thursday’s IPO on the NASDAQ!  We couldn’t be happier for a terrific entrepreneur who has spent more than a decade building his company.

The IPO is Back (v2)

The engine continues to hum.  I wrote back in early January that the “IPO is Back, So Is M&A.” New Q1 2011 data from NVCA reinforces this point, as covered by GigaOM this morning.  14 venture-backed companies completed IPOs in Q1, with 11 trading up from their offering price. Another 49 venture-backed companies are on file.

IPOs are happening because, for the most part, the companies offering their shares in 2010 have beat or hit their forecasted numbers.  As a result, share prices have tended to increase or at least hold their gains.  This makes the investors who buy new offerings happy (they get paid to make money for their investors).  The average tech IPO traded up 42% from its offer in 2010. For those who want more detail on the performance of 2010 IPOs, Pacific Crest Securities has a nice recap available via this link.

Congrats to hiSoft

Congratulations to GGV portfolio company hiSoft (NASDAQ: HSFT) for finishing the year as the #2 performing IPO of the year in the US (up 202%).  The IPO market looks strong now, but that wasn’t the case back in Q1 and Q2 of 2010.  hiSoft and its cohort of IPOs in 2010 have set the table for what appears to be a strong market heading into 2011.

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