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AUGUST 20, 2004
By Sarah Lacy An IPO Afterglow in Googleland The most hyped new issue since Netscape chalked up a very tidy gain on its first day of trading. Peace reigns in the Valley As the Nasdaq closed on Aug. 19, and Google (GOOG ) ended its first day of trading with the stock up 17% from an opening price of $85 a share, you could almost hear a collective sigh of relief across Silicon Valley. It didn't come just from the newly minted paper millionaires who showed up for work with fingers crossed at Google's Mountain View headquarters that morning. Nor was it limited to venture-capital backers Kleiner, Perkins, Caufield & Byers and Sequoia Capital, who decided, in the face of much criticism, not to sell their shares to the public after all. Relief was also on the faces of interested bystanders like C. Richard Kramlich, general partner of VC outfit New Enterprise Associates. When asked how important it was that Google trade up on its first day, he responded with two words, "Very important." "PRETTY DARN WELL." Don't misunderstand Kramlich. The veteran Silicon Valley VC was dismissive of what he saw as the "amateur athletics" surrounding the IPO. And he took umbrage at the dual classes of stock that greatly favored the shares of co-founders Sergey Brin and Larry Page. "They are very smart and technically brilliant," observes Kramlich, but "they still have some things to learn." Given the opening-day results, however, much of the controversy about the way the IPO unfolded could be forgiven: "It was a huge deal, and it got done," adds Kramlich. "At the end of the day, the offering itself was handled pretty darn well." Google's was the most anticipated float Silicon Valley had seen since Netscape went public in 1995. VCs knew it was important that, as Google's corporate mantra says, the much ballyhooed IPO do no harm. In the rough three years since the tech bubble burst, disbursements in new companies haven't exactly roared back -- but they have stabilized at about $5 billion per quarter for the past six quarters, according to VC research groups. And money in early-stage companies is finally starting to tick back up. FIRST OF MANY? The market remains a tad volatile because some outfits have been rushed out without showing profits. With the stakes so high, at least eight companies, including software maker Lindows and The Active Network, an online event-management and marketing outfit, pulled offerings the week before Google's IPO, citing "market conditions." They all wanted to see what would happen. Had Google traded down, it would have sent a strong signal that even a cash cow with impressive prospects for rapid growth can't easily get out of the box. As it is, Google scored a valuation close to the low end of the $108 to $135 range that it originally set before being forced to knock 30% off its targets in the face of the Street's anger over the perceived arrogance of Page and Brin. Today, it looks safe to get back into the IPO waters. Yet, the Google debut offers some hard lessons. For one, and for all of the talk about fixing blemishes in investment banking or putting the small investor on the same footing as the big institutional players, don't expect VC money to follow any more Dutch auction operations in the near future. Nor is the deal likely to whet the appetites of additional companies looking to go public, at least ones not already considering an IPO for this year or early next year. THE POTENCY OF PRICE. Many observers, too, are quick to point out that, in the end, Google's offering wasn't a true auction. With shares bouncing 17% at first trade, $85 clearly wasn't the fair market value, they note. Michael Moe, CEO of boutique investment bank ThinkEquity Partners in San Francisco, doesn't blame Google for that. He says shares need to be discounted to have a successful IPO. It's a big reason he doesn't think Dutch auctions will catch on. "You create activity by where you price," he says. "Investors have the option of being able to buy tens of thousands of companies already trading with history and research reports behind them. Why would they step up and take the risk without that incentive?" In truth, the two biggest criticisms of Google's Dutch auction never came to pass. Pricing at the lower end of the reduced offering amount shows that fears of irrational bidding were unfounded. Those who bought the shares weren't hit with the "winner's curse" of seeing their investment diminish as of the opening bell (see BW Online, 8/20/04, "I Came. I Bid. I Profited"). People close to the deal say many investors were waiting for shares to start trading before buying. They point out that a traditional IPO probably would have priced Google at around $50, not as high as $85, leaving more of Google's potential proceeds on the table. That allows the IPO's boosters to call it a win-win for Google and the stock's purchasers. EASY TO UNDERSTAND. As a rosy glow lingers over Google's headquarters on Sand Hill Road, VCs also now appreciate just how very different the outfit was from most startups seeking to go public. It's a consumer company that retail investors want to own a piece of, as opposed to, say, a maker of enterprise software. Its business isn't difficult to understand, making it a much easier sell to the average investor than say, a maker of biopharmaceuticals. And it already had the sort of brand recognition most startups simply can't afford to build. Marc Randall, CEO of soon-to-be-profitable networking company Force 10 Networks, saw the Google IPO as a big success, but he says if his company were going public in the near future, he would still lean toward a traditional IPO. "Our brand recognition is on the rise, but nowhere near Google's," he says. Force 10 is aiming for an IPO somewhere in 2005. If by then its name were to become a verb in everyday use -- as people now say they "googled" some fact or information off the Web -- Randall says he might consider a Dutch auction. But he's not holding his breath. Expectations in Silicon Valley from the get-go were that Google's offering was such an exception to other tech companies' norms that, while its IPO might not help the startup market, at least it would do it no harm. Turns out Google met expectations. No wonder there are smiles in the Valley.  Lacy is a correspondent for BusinessWeek Online in Silicon Valley Edited by Douglas Harbrecht
BW MALL
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