Bubble Trouble: LinkedIn Deal Has 'Floodgates Open'

LinkedIn’s (NYSE:LMKD) upsized $400 million initial public offering last week, and its soaring stock debut (it's still up nearly 100%), have entrepreneurs and venture investors all atwitter -- and a bit defensive about whether this is the start of Internet Bubble 2.0.

“One good IPO does not a bubble make,” says Jorge Conde, co-founder and CEO of venture capital-backed Knome, which sequences and analyzes personal genomics data. “You’ll see best of breeds, best of class. I don’t think it’s a tide that lifts all boats, that’s ultimately what defines a bubble.”

Investors may soon find out which ideas float and which sink as veteran venture capital investor Don Rainey says, “The floodgates are set to open.”

Rainey says there’s pent-up demand for venture-backed companies due to the dearth of IPOs over the past few years. “The public market is predictably interested in growth stories creating a favorable IPO environment for those growth stories -- many of which are Internet-related, which prompts the bubble comparison.”

There’s that “B” word again. Experienced investors such as Rainey and executives of start-ups openly dismiss the bubble question, at least in these early stages of jump-starting the moribund market for IPOs.

Gilt Groupe CFO Andy Page says, “The LinkedIn IPO is an example that investors are willing to pay a premium for the leading company in a sector. There appears to be less focus on near-term financial metrics than long-term strategic positioning.”

Of course, many investors have heard that line before, and also consider that the fast-growing Gilt Groupe is eyeing an IPO of its own. Page stands by the forecast he gave FOX Business in April that Gilt Groupe will see 50% growth in revenue this calendar year and plans to be IPO-ready in the second half of 2012. The Internet-based social shopping and deal site recently raised $138 million from investors to fuel expansion into new markets and businesses.

Valuation Linked to Reality?

Skeptics point to the lofty valuation for LinkedIn’s stock, which remains well above its $45 a share offering price. It trades at about 20 times revenue for a company that will lose money this year, and boasts a market value of nearly $9 billion. That valuation has raised more than a few eyebrows on Wall Street and beyond.

“There’s no convincing argument as to why things are different (than in the dot-com bubble),” says David Menlow of IPO Financial. “There’s nothing out there in terms of growth expectations or financial modeling. It’s like trying to nail Jell-O to a wall.”

Serial entrepreneur Dennis Fong disagrees. The 34-year old, who’s behind the nascent Raptr social video game platform as well as the Lithium social business customer service, has built and sold online businesses before, during and after the dot-com bust.

He notes the differences between Web 2.0 and the Internet Bubble: “There’s real revenue and profits suggesting these companies -- Facebook, Groupon, Zynga -- are the fastest-growing companies we’ve ever seen. Zynga didn’t exist a couple of years ago, now it’s an $8 billion company.”

Fong also says the margins are much better on these platforms than for dot-com models. He notes it only takes a short time for an artist to draw additional sheep for Zynga’s social networking game “Farmville”, and the virtual animals can be shipped to users around the globe over and over without paying postage and clearing customs.The Trouble with Bubbles

Zach Clayton, founder and CEO of digital marketing agency Three Ships Media, also says bubble talk is premature. “Pattern recognition of bubbles is very, very poor. The nature of a bubble is that things are indiscriminately overvalued and beyond reason. As long as the conversation is focused exclusively around the few industry leaders then there is, almost definitionally, no bubble.

"They may be overpriced, but there's no bubble yet - at least at the public company level. The VC level may be a different story.”

A wave of cash has indeed washed over start-ups in the past few years as investors sought alternative investments during the market turmoil of the 2008 crash. Grotech’s Rainey says, “We are now seeing private market transactions that rival public market transactions, think $1 billion invested in Groupon or $400 million in LivingSocial.”

Grotech itself is an original investor in the social deal site LivingSocial.

Daniel Terry is one of the beneficiaries of this VC resurgence. Shortly after graduating from Stanford with his MBA last year, Terry secured $5 million in funding from Sequoia Capital (which backed LinkedIn and was an early investor in video game giant Electronic Arts.).

Terry, the 29 year-old founder and CEO of mobile gaming company Pocket Gems, says his company was profitable in seven days. Pocket Gems publishes Tap Pet Hotel and Tap Zoo -- two of the top five grossing games in the Apple iPhone App Store.

Not surprisingly, Terry says the LinkedIn IPO is "a sign of good things to come in the market for start-ups." But at the same time, he says Pocket Gems is not close to filing for an IPO or seeking additional start-up cash anytime soon.

"We don't need the capital right now," Terry said. “An IPO is one interesting option for shareholders. And stock would be useful as a currency (for takeovers).”Keeping Score: A Red Ferrari and IPO “Windowpain”

Ed Lewis, Founder/CEO of Media Chaperone, sees takeovers driving the M&A process after the early IPOs hit the market. The company’s Piggyback app helps parents monitor their children’s online game use. Lewis predicts, “The proceeds will likely drive a wave of consolidation as leaders put their capital to work.”

Knome’s CEO Conde, a former investment banker, says the time is right to get deals and IPOs done. “Good IPOs begat more IPOs. The IPO market historically has periods when the window is open and when it’s closed."

The question for many chastened individuals and more than a few fund managers whose fortunes sank with tech bubble stocks is whether the window will slam shut on a few fingers, or whether they can score shares of the next Amazon.com (NASDAQ:AMZN).

Fong always seems to know the score. He was once known as the Michael Jordan of pro video game players for his uncanny intuition and strategy skills. Those tactics and a keen business acumen have served him well as an entrepreneur. He sold Gamers.com to Ziff-Davis in 2001 and then Xfire to Viacom in 2006 for $102 million.

Fong says Lithium, which has raised $40 million from VCs, may be ready to IPO in the next 18 to 24 months. Raptr, with $14 million in backing from Accel Partners, is still in its early stages.

The man who once won a red Ferrari in a video game battle is not in a hurry to speed his companies onto the market.

“The market crashed in 2000, so if you believe in a 14-year cycle (as postulated by Accel Partners’s co-founder Arthur Patterson), then it’s kind of like 1997. We should have two to three more years of good times.”

After that? It may be game over, or as Fong has done on numerous occasions -- time to hit the reset button.