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IPOs of air-filled companies

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Staff writer |
Technology company IPOWhen technology companies goes public they are followed in the media like rock stars. However, rock stars are short-lived and investors are looking for something with good prospects in the long run. And that's a big problem for many future IPOs.


The mania about Facebook Inc.'s IPO could be compared with the arrival of Beatles in the United States. They were well-established in Europe but without a success in the US they certainly wouldn't be a one of the long-lived and most famous bands in the history of rock music. Similar to that, Facebook was well-established among hundreds of millions of its members but without IPO the company wasn't able to develop further.

Now, what happened? After the initial price of $38 per share the first day's close was $38.23, and now it's share is worth $22 (September 15, closing price). After some much anticipation, buyers standing in line, and media coverage from the US to Antarctica, the very first day was disappointing. It was clear that the lack of clear business plan, especially in the segment of mobile business, was the reason for real investors to step back.

Facebook was followed on its path down by Zynga, the company that lives because of Facebook and dies because of Facebook. After the initial price of $10, the first day ended on $9.50, and today the share price is $3.18. However, let's take a look at Yelp Inc., another developer of online games. It's initial price of $15 at the end of the first day rose to $24.58, and today it's worth $26.18. Obviously, Yelp Inc. had something investors believe in and rewarded.

If we put aside question about the initial price, which in the case of Facebook we believe was too high, it's clear that some IPOs went very well for companies but not for investors. Companies rose a huge amount of money but investors in the long run and retailers are not so happy. Companies that went to public had neither clearly defined revenue stream nor the content that's hard to beat.

It's not important will company start to generate real money today or in one year, it's important to have a solid business plan in place, a plan that shows that top management thinks about future, beyond "take money and run" first day of trading. Facebook was unclear what it will do about mobile business and its founder Mark Zuckerberg was silent for too long before he offered some hope to investors. Sheryl Sandberg obviously couldn't do much about it because at the end of the day Zuckerberg is the boss.

Content also must be mentioned. Millions of fans, followers and members are worth nothing if you don't have great content. Endless streams of pet photos, status updates and friendly chat doesn't bring bread to the table and investors know that. They also know that it's more worth to buy a smaller company but with a great content. That show that the leadership think about future and has some idea where the company will be in a few years.

A big site is without great content is just a big thing filled with nothing: that things are called balloons and balloons tend to go BOOM! and investors don't like that. That's the main reason why there's a difference between Noname Car Co. and Maybach. The former is selling something, the later is giving great value for the money.

Thus, technology companies, especially those closely related to the internet, will have to think hard what they are offering in the long run. How quality is their content? What's the plan for the future? How will they use investors' money to make a steady revenue stream? Without clear answers to those questions there will be no success. So, don't estimate investors. They are dealing with billions and those who deal with such amounts of money must be smart. Don't try to sell them hype.

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