In what was hoped to be a year end homerun for venture capital, the Zynga IPO turned out to be the last out as the offering was met with tepid enthusiasm by investors who eventually drove the stock price down on its inaugural trading day. Although its initial valuation of $20 billion was slashed to $9 billion on the offering, at $1 billion, it was still the largest U.S. Internet offering since Google. There was a lot of anticipation around Zynga due to its link to Facebook. Facebook, which is planning its IPO for early next year, is suddenly being look on with some trepidation by analysts. Zynga stock is currently trading at $9.50, 5% off of its offering price.
For a few VC firms, the IPO did score a few runs with initial funder, Foundry Group, on tap to collect $370 million on its investment of $1.6 million back in 2007, depending on it was able to exit before the stock’s decline. Other investors, such as Avalon Ventures, Union Square Ventures, and Kleiner Perkins Caufield & Byers should also come out way ahead.
On a bright note, and one that didn’t get a lot of attention until it actually happened was the IPO of Michael Kors Holdings Ltd, a luxury clothing designer and producer. Its offering of 47 million shares at $20 came out above the expected price range of $17 – $19 and has traded as high as $25. It currently trades at $24.50. To the consternation of high tech and internet VC firms, retail IPOs have performed brilliantly this year. The demand for Kors and other luxury goods companies has been strong due to the turnaround in the industry after being clobbered in the 2008 downturn.
The primary beneficiaries of most of these retail and luxury goods offerings have been the private equity firms that have been sitting with these companies through the worst of markets. Sportswear Holdings cashed out its majority investment in Kors.
Not all is gloom for VCs and the IPO market. After all, Zynga’s was the largest since Google and money was made. It’s lackluster stock performance after the offering can be attributed to the large float – 14% versus 5% for Groupon – and the general stock market blues (no Santa rally). The good news for investors is that Zynga may turn out to be more fairly priced than past IPOs. The bad news is that future IPOs may not be looked upon with the same zealousness that we have come to expect.
