04:10 AM

IPOs And The Pre-IPO Valuations Bubble...

Therese Poletti, over at MarketWatch reports that this year's Tech IPOs have done well:

Tech IPOs gaining some momentum Therese Poletti's Tech Tales - MarketWatch

Already this year, there have been seven tech IPOs, which have raised $700 million in total, with an average return of 26.5%, according to Renaissance Capital, an IPO research firm which also manages an IPO fund and an IPO index. Kathy Smith, principal at Renaissance, is more cautious, and notes that there have also been two tech IPO withdrawals this year.

She makes a good point in where the "bubble" is:

"It's not a bubble," Smith said of tech IPOs. "Where the bubble is happening is in Silicon Valley in pre-IPO valuations."

If the bubble is in pre-IPO valuations then the danger for upcoming IPOs is that they have to be priced very high. Pricing IPOs is a balancing act because you need to set expectations just right and make sure the pricing provides some momentum for the stock going forward.

With high valuations for Facebook, Zynga, and others, when those companies prepare for their IPOs 00 expected in 2012 -- there has to be a good enough story to justify their upside to the next wave of investors. What is going to be the Facebook story next year?

Then there is the issue of an "overhang" in that early investors will be looking to cash-out after the IPO, putting downward pressure on the stock price. This will be something IPO investors will have to consider.

While it is nice to raise capital in secondary markets, the problem for Facebook, Zynga, and others that follow this route, is how do you keep your story fresh, and growing, so that the next set of investors, the public has confidence in your future?

After all, a lot can change in a year -- maybe that's why Facebook, Zynga, etc, are trying to cash-in now rather than later.