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.”

Content, Community and Commerce: Why Verticals Win

Houzz1When it comes to the three C’s – Content, Community and Commerce – we have a very basic thesis we have been investing around for several years now: vertical platforms win.

What do I mean by “win?” Deliver a (much) better experience for users. Create value for brands and advertisers. Deliver higher monetization rates (and thus value) for management and investors. Win for consumers, win for brands, win for management. And they can do it at scale, which is where we believe many of the horizontal platforms start to degrade.

How do they do it?

Content. By focusing their efforts on a specific interest area, vertical sites can deliver the best user experience around content. Images, text, search and sharing are all tailored to the area of interest. Don’t believe me? Look up “kitchen” or “kitchen remodel” on Pinterest, then go to the “Kitchens” section on Houzz. For someone who is interested in architecture, design or remodeling kitchens, the experience on Houzz is dramatically better (unless you want a random picture of a naked woman in a kitchen, which did pop up in my search on Pinterest).

Community. If in a large enough category (think: home improvement, music, fashion, travel), a vertical platform can amass a big enough audience to truly create a thriving community. Yelp has done this exceptionally well in a giant vertical, and now has more than 100 million unique monthly users. Google, Foursquare and startups like Ness are challenging (especially using mobile as a trojan horse), but Yelp has the largest and most focused community, and it’ll be tough to beat Yelp if it continues to innovate. Another great example is Zillow, where users are encouraged to “claim” their home and input their own data and photos. It’s working – Zillow has more than 45 million unique visitors every month, and more than half are on a mobile device. Last year we invested in an e-commerce business called Citrus Lane which is focused on building a large community of moms around its brand; a community opportunity we don’t see with many other e-commerce businesses. Given that moms spend more than $45 billion each year on their babies (first time moms spend $16 billion alone), and more than 100,000 babies are born every day in the U.S. alone, we think this category is not only large enough to support a vertical winner but also emblematic of a “mobile first” opportunity. More and more moms spend the majority of their time on their iPhone or Android device and very little in front of a PC.

Commerce. The beauty of nailing content and community in a vertical platform is your users actually want a commercial experience. And when I say “commercial experience,” I don’t just mean “ads” (which tends to be the de facto model for horizontal platforms). Meilishuo, the top vertical platform in China for women’s fashion has more than 4 million daily active users, almost all of whom are females between the ages of 20 and 35. It’s a highly focused, engaged and active community. When you utilize Meilishuo (best on iPad), one of the first things you’ll notice is it’s intentionally commercial – you can click to purchase more than 95% of the content on the site. You don’t see that on horizontal platforms like Instagram or Pinterest. As a result, Meilishuo is driving hundreds of millions of dollars of GMV (gross merchandise volume) in the fashion category. (Funny anecdote – when I was in NY with Meilishuo CEO Xirong Yu, I showed him Instagram. He kept clicking on images and saying “Why can’t I buy it?”)

Perhaps the most important point is this last one: these vertical sites are intentionally set up to drive commerce. It’s part of the core user experience. Upon introducing several friends to Houzz last year, more than one came back to me and said “I’d like to see more tags!” The products are part of the user experience and – done in a tasteful manner – play an integral role in the consumer’s engagement on the site.

The biggest challenge with vertical platforms – historically – has been getting enough critical mass to matter.  There are vertical sites all over the web for almost every niche interest you can think of. Many of these are in fact small, thriving communities with no venture capital backing and a highly profitable business model. Others – like those mentioned above – are already big and getting bigger (think Spotify, in music). Given the commercial aspect of these vertical platforms, they tend to monetize at a much higher rate per user than their horizontal peers. As Xirong from Meilishuo put it to me: “I don’t want a billion users. I want the most valuable 200 million users.”

Horizontal platforms play an important role in the Internet ecosystem, and my bet is Facebook and its social graph will play a really important role for a very long time. But – it will be very hard for other vertical platforms to gain prominence, and few (if any) will monetize as well as the rising vertical platforms. These new vertical platforms are also the most likely to develop innovative forms of monetization as we move to a “mobile-first” environment (phone & tablet).

A few questions we’ll be watching closely over the next year or so (that this post doesn’t attempt to answer):

– Will the horizontal platforms (Facebook, Google, Tencent, Baidu, etc.) eventually “win” in these large categories, despite early leads from the upstart innovators?  Seems unlikely, unless… (see next point)

– Will the big horizontal platforms acquire the new vertical leaders in the interest of garnering eyeballs and also alternate / non advertising-based models of monetization?

– Will the emerging vertical platform leaders be able to go global – as the horizontals have (more than 75% of Facebook users are from outside the U.S.)? As they do, will they be beaten to the punch by local vertical leaders?

– Will we see many, valuable vertical players (sort of like the SaaS space in enterprise), or consolidation and just a few winners?

Many unanswered questions, but a battle that will be fun to watch with billions of dollars at stake.

Disclosure: my firm, GGV Capital, invests across the US and China, and is an investor in Houzz, Citrus Lane and Meilishuo.

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