Last week LinkedIn soared to unexpected heights as it debuted as a publicly traded company on the New York Stock Exchange. Priced at $45, LinkedIn shares more than doubled by the end of its first day as a public company, spiking close to triple the $45 offering price before sliding back. On Friday the stock closed over $93, but on Monday the stock opened at $86.45, and at mid-day it was bouncing around slightly north of $85 per share, and by mid-afternoon it started to climb once again toward $92. See NYSE: LNKD.
It is still early to know whether this is irrational exuberance or whether this is a meaningful event for the companies that follow LinkedIn to IPO. In all likelihood it is a little of both, namely a meaningful event that demonstrates at least some irrational exuberance. With the economy and the IPO market having been in the tank for so long a little zeal never hurt anyone, right? In any event, regardless of what LinkedIn does from here on out the fury of trading and interest suggests that good things are on the horizon for the economy and perhaps for job creation as well.
By any fair definition the LinkedIn IPO has been a huge success for LinkedIn. Whether those who purchased the shares will likewise succeed remains to be seen, but the intense interest of the LinkedIn IPO is likely a good sign for other companies, particular Internet companies that are waiting in the wings. If you are an owner in Facebook, Zynga, Twitter or other similar companies you have to be nearly giddy today. But will that translate into good news for the economy and for capital-intense businesses not characterized as Web 2.0 companies?
According to the Wall Street Journal Blog:
Successful IPOs like LinkedIn’s get more people interested in investing in start-ups, boosting angel and venture-capital coffers. They also free up money: VCs that were in LinkedIn can put the money into earlier stage, angel-funded companies, and then the angels can put money into garage-level start-ups. The whole process got out of hand in the late 1990s, of course, but a little touch of the old dot-com fever might not be such a bad thing for the economy right now.
It is certainly true that investors love a good exit strategy, particularly one with enormous multiples that return silly amounts of money. A healthy IPO for LinkedIn should make angel investors and venture capital firms stand up and take notice. With more of a reason to believe there are homeruns, or grand slam homeruns, to be hit we should expect more angel activity and more venture capital activity.
When a company starts out, particularly a tech company, profits are a distant dream. In order to get to the point where the company is profitable years will be necessary, which means someone has to pay the bills in the meantime. That is where the investors come in. Those starting companies will typically self-fund for at least a while, but at some point comes the reality that money must be raised in order to do the building, innovation and hiring necessary to keep the business growing and moving forward toward profitability.
Angel investors come first. The best type of angel investor is usually one who has had some experience in the business world and has a successful track record. Angels can be just for money, but if you really want to take your company to the next level you want an angel who can provide more than money. At the very least you want an angel who has connections; a deep Rolodex (or LinkedIn account). Angels are there not only to provide money, but are frequently there and best used, in my opinion, when they offer something tangible relative to growth opportunities. An angel with money on the line, who is willing to contribute some business savvy and who is familiar with the venture capital market is truly a wonderful asset for a start-up growth company, particularly a tech start-up that will need to last upwards of 10 years before gaining profitability.
In many, if not most, cases the angel investor (or investors) are a step on the way toward attempting to obtain venture capital. Over the past decade it has become harder and harder to obtain venture capital though, which is why a successful LinkedIn IPO is potentially so exciting.
Great Again: Revitalizing America’s Entrepreneurial Leadership is an absolute must read if you are at all a serious player in the patent, innovation and start-up space. The authors Hank Nothhaft (a serial Silicon Valley successful CEO) and acclaimed author David Kline explain the difficulty of obtaining venture capital today. They write:
[M]ost of Silicon Valley’s movers and shakers openly acknowledge that it is almost impossible to obtain funding for any sort of capital-intensive start-up business. The problem is not simply the limitations on capital or on the types of innovation that can attract funding. It’s also the increasingly burdensome business environment for start-ups.
Nothhaft and Kline did numerous interviews with a whose-who of Silicon Valley, interviewing one of the true Titans of Technology, Steve Wozniak, the creative genius behind the Apple computer. Wozniak told Nothhaft and Kline that Apple probably couldn’t attract venture capital with today’s investing climate. Let that sink in for a minute. Wow!
But what all the excitement about what LinkedIn’s IPO could mean for investing and in particular venture capital? Nothhaft and Kline explain:
Why should we care about the state of the venture capital industry? Despite the fact that probably only one of every six hundred start-ups ever receives venture capital funding each year, this uniquely American form of risk capital has always had an outsized and positive influence on America’s innovation and job-creating machinery.
Nothhaft and Kline then go on to rattle off eye-popping statistics.
- 60% of start-ups that undertake an IPO are venture backed firms.
- According to the National Venture Capital Association job growth at VC-backed firms is 1.6% versus .2% at non-VC-backed firms, making VC backed firms roughly 8 times more productive at creating jobs.
- According to the National Venture Capital Association, since 1970 VCs have invested roughly $500 billion in more than 27,000 start-ups, employing 12 million people today and contributing $3 trillion to the US economy, which is 21% of total US GDP.
We also all know, because politicians and the media say it all the time and it is actually one of the few things that they say that is objectively and concretely true — small businesses are responsible for the overwhelming amount of job creation in the United States. It is, however, better to say that that start-up businesses are overwhelmingly responsible for job growth. Notthaft and Kline say: “[S]tart-ups are also the one and only consistent source of new job growth in the U.S… If you took start-ups out of the picture and looked only at established firms, job growth in the U.S. over the last thirty-four years would actually be negative.” (emphasis in the original). Simply put, we need start-ups to succeed.
Start-ups aren’t the only thing that matters, however. According to Pascal Levensohn, Managing Partner of Levensohn Venture Partners, “92% of the job growth in venture-backed companies occurs AFTER their IPO.” See Connecting the Dots. Thus, we need more IPOs. Of course, there is something of a chicken and an egg problem here because without angel investing to provide that critical initial influx of money companies can’t get to the venture capital funding level. Without venture capital the already low odds of going public become lower. Without going public the economy benefits from job growth, but nothing like the job growth caused by a start-up company that has matured through the ranks to go public. Thus, the LinkedIn IPO could be an enormously important event and prove that there is a light at the end of the tunnel of the Great Recession.
Not to rain on your parade after having hopefully built up some optimism, but the reality is that these nouveau tech companies, such as LinkedIn, Twitter and Facebook, simply don’t employ nearly as many people as their market valuation suggests they should, at least not when compared with the Mega-giant corporations. For example, in January 2011 Facebook was valued at $50 billion and had just over 1400 employees. Nothhaft and Kline explain: “By way of contract, the $35 billion Sony Corporation employees more than 170,000 people, $50 billion Boeing employs 157,000 people, and the $70 billion Walt Disney Company employs 144,000.” By way of further contrast, as of January 2011, LinkedIn had about 1,000 employees.
Indeed, there is reason to be cautiously optimistic about what the LinkedIn IPO means for the economy and job creation, but these Web 2.0 companies are not likely to provide the employment growth we need. If angel investors, venture capitalists and the nouveau riche become emboldened to take their trillions of dollars sitting on the sidelines and start investing in start-up companies then a multiplier effect could pave the way to much greater job growth and prosperity. Of course, it would sure help if Congress and the White House were to embark on business friendly, investor friendly and manufacturing friendly policies. As Nothhaft and Kline explain, with just a few minor tweaks a coherent national innovation policy could erase any competitive advantage China has over manufacturing in the United States. Now that would be a game changer!
EDITORIAL NOTE: If you didn’t pick up on it, I think Great Again: Revitalizing America’s Entrepreneurial Leadership is an essential read for innovators, business people, patent attorneys and anyone at all interested in a bright economic future for the United States. I cannot recommend this book highly enough. Everyone should read it, starting with Members of Congress and key Officials in the White House. Technology and innovation can, should and must play the predominant role as we attempt to emerge from the Great Recession.