New wave of hot internet floats building

By Barbara Ortutay

Twitter's successful IPO has fuelled interest in tech companies even if some are yet to make a dollar's profit

Twitter co-founders Jack Dorsey, Evan Williams and Biz Stone on the day of the firm's IPO. Picture / AP
Twitter co-founders Jack Dorsey, Evan Williams and Biz Stone on the day of the firm's IPO. Picture / AP

Just as one high-tech breakthrough often paves the way for the next big thing, technology IPOs move in virtuous cycles, too.

Twitter's scintillating stock market debut punctuated a procession of eagerly awaited coming-out parties over the past two and half years, providing a springboard for a new generation of rapidly growing startups to make the leap to Wall St.

The next wave of potentially hot IPOs includes trendy services such as AirBnB, Square, Spotify, Dropbox, Uber, Snapchat, Pinterest, Box, Scribd, Flipboard and Most of their services are tailormade for smartphones and tablets, a crucial characteristic that helped to feed the rabid demand for Twitter's stock in its initial public offering this month.

Despite the short-messaging service's unprofitable history, Twitter is now worth about US$25 billion - a valuation that has enriched its founders, staff and early investors.

"Twitter just made it clear that the IPO window is open and a lot of success can be had," says Ira Rosner, a lawyer and shareholder for Greenberg Traurig, a law firm that helps prepare companies for IPOs.

Other startups and the venture capitalists who provide them with rounds of funding will be angling for similar windfalls by filing their own plans to go public over the next two years, Rosner believes.

"There is no question that a successful offering encourages other offerings. It gets people excited and it creates buzz."

Even before Twitter's IPO, good vibes were rippling through the stock market as the Dow Jones industrial average and Standard & Poor's 500 indexes repeatedly set new highs. The fertile conditions have produced 199 IPOs in the US this year, according to research firm Renaissance Capital. At this pace, 2013 is on track to be the biggest year for IPOs in a decade.

Sentiment among venture capitalists is also strong, the highest since 2007 according to a survey by Mark Cannice, a University of San Francisco professor of entrepreneurship who polls Silicon Valley financiers.

The companies generating the most interest from venture capitalists include Uber, the provider of on-demand car services that received US$258 million so far this year, and Pinterest, which nabbed US$425 million. Pinterest's latest round of financing, for US$225 million, valued the popular online pinboard service at nearly US$4 billion. The San Francisco company just recently began trying to generate revenue, which means it could be several years before it becomes profitable.

Snapchat, meanwhile, recently turned down a US$3 billion buyout offer from Facebook, according to a Wall Street Journal report citing anonymous insiders. The report also said China's Tencent Holdings had offered to invest in the company at a US$4 billion valuation.

"The market is signalling that it is very receptive again to these young, high-growth social media internet companies," says Tim Loughran, finance professor at the University of Notre Dame in Indiana. Twitter's successful IPO even proved that it is irrelevant whether companies are profitable, he says.

A string of IPOs that began with the May 2011 debut of professional network LinkedIn helped fuel investors' interest in rapidly growing internet companies. Other online services with large audiences followed LinkedIn into the public stock market, including online review site Yelp, internet radio station Pandora Media, daily deal maker Groupon, online game maker Zynga and social networking leader Facebook.

Groupon and Zynga have been duds so far, largely because they did not adjust quickly enough to shifting market conditions, but the rest are trading above their IPO prices. LinkedIn and Yelp have more than quadrupled their value, making them star performers among the group.

Facebook's May 2012 IPO spooked many investors because of trading glitches and questions about the company's ability to grow mobile revenue. But the company has since soothed critics by proving it can make money from mobile advertisements. The stock is now trading well above its US$38 IPO price after losing more than half its value in the first four months of trading.

The next batch of startups expected to test their fate on the public market does not include names as well known as Twitter or Facebook, so splashy IPOs of either's calibre are unlikely. Twitter's US$1.82 billion market debut made it the second-largest internet IPO in the world, relegating Google's stock market debut in 2004 to third place.

Twitter could prove even more influential than its IPO predecessors because of the route chosen to market it and its financial condition. The San Francisco company took advantage of a federal law passed last year that allows companies with less than US$1 billion in revenue in their last fiscal year to keep IPO documents under seal until the final few weeks before a price is set on a stock offering. This alternative, known as the Jumpstart Our Business Startups, or JOBS, Act allowed Twitter to secretly fine-tune its filing to satisfy regulators.

Although Twitter filed its IPO paperwork in July, the information was not unsealed until October, just five weeks before its stock market debut. In contrast, Facebook's IPO filing was accessible and picked over for more than four months before the company's stock market debut.

The confidentiality provided by the JOBS Act means some promising startups may have already started the process to go public, but have not yet revealed their plans. By keeping its finances under wraps, Twitter minimised the time people had to dissect the mounting losses it is absorbing as it expands its service to accommodate 232 million global users. Investors' willingness to embrace a firm that has lost nearly US$500 million since its 2006 inception is likely to embolden other unprofitable startups.

For privately held companies, startups rarely reveal anything about their finances until their IPO filings. But some, such as Snapchat and Pinterest, are generating little or no revenue as they subsist on venture capital. Many of the companies that are producing revenue rely on advertising, a dependence that worries Larry Chiagouris, marketing professor at Pace University's Lubin School of Business in New York.

"If you fast-forward beyond the next 24 months, people will realise that these companies just aren't going to make a lot of money. Advertisers are not putting a large portion of their budgets into these companies."

Chiagouris thinks the stampede to invest in Twitter and other money-losing startups is heading in the same direction as the dotcom bubble of the late 1990s when a horde of unprofitable internet companies were ushered on to Wall St.

"People are chasing the dream of profits as opposed to any evidence of profits."

- AP

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