What does all this Tech IPO madness mean?
October 24, 2012 Leave a comment
Its turbulent times for IPO’s for technology stocks as companies with robust business models like Workday and LinkedIn gain ground and those with flaky, transient business models come under scrutiny from the hardened analyst community.
Whilst some canaries are now calling the implosion of Zynga (another 100 layoffs yesterday) the beginning of the end of the technology “bubble” – this feels like too broad a generalisation. What seems to be happening is that the broader market divide in valuation multiple between the stocks everyone wants to own and the rest is finding its way to Silicon Valley. Until now it has been tough to find the courage to short technology stocks but the current stock price disintegrations ( Zynga & Groupon to name the obvious) is only going to give the bears more confidence, so we can expect this differential in performance to continue.
Business model aside, another key element to maintaining stock price performance is the companies’ innovation engine. Whilst innovation is alive, optimistic investors have something to hang on to and shorts struggle to settle and build positions.
The key to innovation culture is the management team and its ability to attract & support talent.
In investing in private companies we always retain a primary focus on the balance and effectiveness of the team. But do public markets attribute enough value to quality of management? We need to remember that technology companies operate in fast moving markets and only great management can adapt to these twists and turns; good products can’t adapt by themselves.
A bit off-topic, but Yahoo looks like an interesting company in this respect. It’s rapidly building the right culture and team and with a few positive surprises this company could soon become a must-own (we don’t invest in the public markets).
So we are not overly concerned about what we see in the IPO market; however it does help to focus the mind on two key elements of a successful business that are not ephemeral; quality, cohesive management teams and products that breed deep commitment from clients and hence resilient revenues in all economic climates.