One of the big, recent trends among the high-profile consumer web companies has been to raise big rounds of private equity capital instead of going public. It's a great deal for the companies: 1) they get the capital they need to fund growth without having to live with the scrutiny of the public markets, quarterly numbers; and, 2) given the plentiful supply of private equity dollars (can't bring myself to use the term "venture capital" here because it isn't) chasing these deals, the companies get the rich valuations they used to have to go public to realize. Everything works with this model until the company sees a hiccup...
...Like the ones we've seen from Groupon and now Zynga.
Both companies' growth has slowed (in Zynga's case Q2 bookings declined sequentially for the first time) and so whatever valuations they would have achieved in the public markets 6 months ago, it is significantly less today. The problem is that the existing shareholders never had the opportunity to sell some or all of their positions during the run up or down. (yes, the secondary markets have provided some liquidity but not to the extent of having public float)
It's really hard for a company to keep chugging along at huge growth rates and never miss a beat. Take a look at Zynga's quarterly revenue ramp and, from the point of view of an existing shareholder, you wish you'd had the chance to sell before the laid an egg in Q2. Unbelievable premiums are paid for companies that are forecast to grow at huge rates - and valuation corrections of 50+% are common for high-flying companies that show a single sideways quarterly number like Zynga's Q2. By staying private, the company is locking all shareholders into the bet that the current growth rate will continue... Zynga's shareholders just lost that bet.
LinkedIn has managed to have the best of both worlds. Over the last 6 months, the company has gone public at a great valuation, provided liquidity to private investors and public float for new public shareholders, and seen its valuation more than double from the offer price. Fantastic.
It was inevitable that the "piling in" to some of the Consumer Internet high-fliers will slow down - the aggressive moves made first by DST (and more recently by AH and a number of other firms) to "pay up" to get into the category leaders at ever-higher valuation premiums can only go on for so long before it's no longer a winning strategy. I would expect some of these investments to slow considerably. Then it will be interesting to see if Airbnb, OneKingsLane, Tumblr and others decide to pursue a public offering and establish a public market for secondary trading, while their performance numbers are still up and to the right.
