Tech sector hopes fade amid ‘bubble’ fears 

Toby Lewis

The sky-high valuations on the listings of venture-backed US technology companies, including networking firm LinkedIn, daily-deals company Groupon and gaming company Zynga last year brought the venture industry firmly back into the spotlight and raised fears of a fresh tech bubble.


Forever blowing bubbles

The spectacular deals are regarded by many as an aperitif, ahead of the main course of the expected $100bn Facebook IPO this year – with trendy rival Twitter also waiting to be served up to the public markets. The ability of the venture industry to generate such spectacular social media successes has prompted market participants to label this period as dotcom 2.0.
Marc Andreessen, co-founder of venture firm Andreessen Horowitz, wrote in an August Wall Street Journal comment piece that “software is eating the world”, setting out an extremely bullish case for the next generation of technology companies.Yet, this month, in a volte-face, he told the same publication that his firm had “taken a step back”. And this from a firm that backed Facebook, Twitter and Groupon, among other recent runaway success stories, and arguably has a vested interest in talking up the sector’s prospects.

The exuberance of last year has given way in some quarters to the more sobering belief that tech companies, excluding top-quality social media brand names, will have limited access to the IPO market this year, with deals that had been in the pipeline stalling, amid signs that investor appetite is starting to wane.
In contrast to the fanfare that greeted several of last year’s blockbuster tech IPOs, their aftermarket performance has been less than stellar.
Zynga, which floated at $10 per share in mid-December, was trading at $8.45 last week after recovering from an $8 low. Groupon, floated at $20 per share in early November, hit a $26.19 closing price high later that month, before receding to $18.50 by last week. LinkedIn has fared better since its May flotation at $45 per share. That remains its lowest price level, having since surged to a closing-level high of $109.97 in July before settling back to $66.87 last week.
Damp IPO prospects
Inmaculada Martinez, partner at UK advisory firm Opus Corporate Finance, highlighted the eurozone sovereign debt crisis and US national debt concerns as negative factors, and believes the patchy performance of previous IPOs will dampen activity this year. She said: “Many of the IPOs planned to come to market last quarter did not go out. Of the technology companies planning to go public, many will withdraw in 2012.”
Tom Anthofer, who tracks the venture sector at secondaries firm Cipio Partners, said: “During the second half of 2011, the perceived threat of a distinct slowdown and possibly a renewed recession became self-fulfilling. You see that in an increased risk-awareness across the industry, which, in turn, shows through in slower, more haphazard decision-making by investors, fewer fund commitments by LPs as well as less appetite in the M&A and IPO markets. Aside from some very high-profile social media companies and a few flavour-of-the-month segments, you are looking at a market which continues to recede on the back of that heightened risk-awareness.”
Besides the mixed performance of last year’s banner flotations, venture investors warn that headline-grabbing flotations at hefty valuations are not available to any but the best companies, and caution against counting on them when assessing returns on venture investments. They also believe access to the IPO market remains limited.
Hendrik Brandis, managing partner at German firm Earlybird Venture Capital, said: “Spectacular IPOs raise interest in the sector. Believing these huge IPOs are the driving force for outstanding [venture capital returns] is unwise and unrealistic. I don’t see the opening of the broader IPO markets.”
Banking on trade exits
The situation has sparked predictions that 2012 could drive consolidation in the venture sector. Anthofer predicted a rise in secondary venture deals, as companies struggling to exit investments hunt for liquidity at a time when the fundraising environment, too, is tough. The number of firms raising capital dropped in both Europe and the US, according to VentureSource statistics out last week.
However, private equity firms maintain that they can continue to fund their portfolio companies on the private market. Mike Chalfen, a general partner at UK venture firm Advent Venture Partners, said: “A large private equity round as an alternative to a public round is a trend that will continue. Private equity has become a real alternative.”
Trade exits through sales to corporates have been mooted as the most likely outcome for many companies in the foreseeable future. Brandis said: “Corporates are sitting on so much cash. There is little alternative to spending their money on M&A. I am pretty optimistic corporate levels of activity will stay up, as we are in a situation where the large corporate world is accumulating cash at an unbelievable speed.”
Whether the latest bubble has burst or merely deflated, venture specialists may be sensible in playing down the tech sector’s prospects in the IPO markets, but a return to form on that front would be a welcome addition to their exit-route armoury.

Copyright: Financial News, London