Social networking website LinkedIn went public in May and the share price more than doubled on the first day of trading. By all accounts, it was a very successful IPO: LinkedIn raised over $350M in an offering that valued the company around $3B, and the existing and IPO investors could book a substantial, immediate return. In contrast to the hope of a mere resuscitation of IPOs in biotech sector, murmurs of another tech bubble ensued after the LinkedIn offering. Other tech IPOs in 2011, namely Zillow and Qihoo 360 Technology, also enjoyed extraordinary first trading days, appreciating 79% and 134%, respectively.
The extraordinary first day pop in LinkedIn’s share price elicited some criticism of the IPO underwriters. Did they deliberately under price the offering to reward preferred clients and, by doing so, essentially cheat LinkedIn out of millions of dollars? I doubt it, but based on historical data from RenaissanceCapital.com, a doubling of share price on the first day of trading is truly exceptional and harks back to the bubble years of 1999 and 2000. On average, IPOs appreciate around 10% on their first day of trading.
Because IPO pricing is as much art as science, one might guess that IPOs for pre-revenue biotech companies, for which valuations are arguably more challenging than for revenue-generating IT companies, would be prone to such dramatic first day pops (or drops). Indeed, when I looked back at the 34 life sciences IPOs during the bubble years of 1998-2000, I found that the average first day pop was 45%, and that 8 of the 34 showed first day pops of 75% or more. The top of the pops during that period were:
Of course, one must not confuse a fast start with a short course. Remarkably, each of the life sciences companies with explosive historical IPOs listed above are still independent companies (note that Antigenics is now called Agenus) and all except Illumina are trading lower on a per share basis than the IPO offer price. I often remember this point when I read the impressive press releases announcing large, syndicated Series A rounds for private biotech companies.
Here again, the fast start does not mean a short course for private companies. Using the MedTRACK database, I ranked by size the 774 Series A financings in the US from July 2006 to July 2011 and looked at how the top 10% have fared. Not surprisingly, nearly two-thirds (46/74) of largest Series A round occurred before 2009, which shows how the economic downturn has impacted life sciences venture capital. More than two years have elapsed for those 46 companies and yet I counted only a handful of exits: 3 IPOs (Pacira, Sagent, and Zogenix) and two M&A exits (Calistoga and Rule-Based Medicines). Now, there have been other exits for companies of that vintage (e.g., Alnara, Trius, etc.) but their Series A rounds didn’t give them the “fast starts” I am referring to.
Do first day pops in the public markets or supersized Series A venture rounds tell us anything? Not much. They are little more than snapshots of investor expectations taken against a backdrop of macroeconomic conditions.
Considering the dramatic change in market sentiment over the last month, from a comparatively bullish first half of 2011 to a string of dramatic down days in August, it is clear that fortunes can change quickly. This is the challenge of the long course to building a successful business.