Why tech needs more IPOs like Zynga's $1B offering

Zynga will raise a bundle through an IPO--without resorting to cheap tactics like pumping up demand with a limited share float. Startups and VCs, take note.

Flickr user ToonariPost
Zynga has finally put numbers to what it wants to raise in an IPO: anywhere from $.85 billion to $1.15 billion. That's 100 million shares at a range of $8.50 to $10 a share.

Before you conclude that this is just another manipulative march of the high tech financiers, take another look. In a number of ways, Zynga is breaking with startup-looking-to-go-public business as usual. The likely reason is the number of newly-public tech companies that have already seen their stock prices drop below IPO levels. Maybe it signals a new direction for tech IPOs, and that would be a good thing all around.

The teasing come-on
Investors--both the big institutions as well as individual consumers--are mad for tech stocks. Past history is the guide to this current performance. People hope to get in early on the next Google (GOOG) or Apple (AAPL). Or if not something that big, at least a stock that will jump some in price and let them take a profit.

Tech companies moving into the IPO phase have used that desire to their advantage. Many, including LinkedIn (LNKD) and Groupon (GRPN), use a tactic called a low-float IPO. They (under the insistent tutelage of their investment bankers) release a small amount of stock, knowing that scarcity will drive up share price, at least in the short run. If done right, inside investors get to sell off shares at a pretty profit, while those who hop on the bandwagon afterward can lose when share prices don't move up enough to let them get out.

You can even get situations like Groupon, where mere weeks after going public, buyers' remorse set in and the stock fell below the IPO price. Even some recent good sales news that boosted the price still left it below the $20 IPO watermark. (It's worth noting that this phenomenon is not entirely limited to tech stocks -- savvy investors have long known that IPO shares are often a better value months, rather than hours, after the initial offering.)

And now for something completely different
Although at first rumors predicted that Zynga would go the low-flow route, the company's just-amended S-1 filing was a surprise. Not only would there be 100 million shares available -- 14.3 percent of all shares outstanding in the A, B, and C stock classes together -- but in the $8.50 to $10 range, it would have a lower initial price than other recent IPOs. (To be realistic, many tech IPOs increase in price in the last week or two if there's enough demand in evidence.) And the company is actually profitable.

Not all is kind looks and soft words. Because of the stock class structure, voting is heavily tilted to the insiders, and Zynga changed the way it recognized revenue last quarter, which made the latest round of black ink possible. But on the whole, it's a company that can make money and that has pulled back some from the frenzy to drive up short-term stock prices so insiders can get theirs and the heck with everyone else. It's exactly what tech startups need more of: Profits and long-range thinking that considers the investors, not just the founders and original VCs.

 

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