Over the past week, I’ve argued that the LinkedIn (LNKD) IPO would be the first major validation test of private secondary markets. If it had priced slightly higher than where LinkedIn shares were trading privately — $35 per share in February and March, according to SecondMarket – then it would mean the private markets were functioning properly (i.e., discounted prices in exchange for early purchase and lack of financial disclosures). If it were to have priced lower, then secondary market buyers would have fled like Jorge Posada from the 9-spot.
So yesterday’s $45 per share IPO price fell into the positive validation category. And I’m almost certain that today there is a huge surge in buy-side interest for shares of Facebook, Groupon, etc.
So far, so good. But LinkedIn didn’t just price at $45 per share. Its stock more than doubled in price, meaning that those who sold on secondary markets may have accepted a massive discount. I say “may” because we won’t actually know until insider lock-up periods expire (premature sample: stock is back up above $100 per share in early Friday trading). But let’s imagine that LinkedIn is still trading at $80+ in a couple of months. Could that cause holders of Facebook, Groupon, etc. shares to reassess plans to sell privately? After all, it would seem that public market investors are willing to pay extraordinary premiums.
To be sure, certain private sales are done to help the seller buy his or her first home, send a kid to college, etc. In other words, to generate immediate liquidity. In those cases, the prospect of future (greater) riches may not matter. But for everyone else, the most appealing strategy may be “hold.”
A counter-argument here is that LinkedIn is a very different company than the other social networks, and that its particular fortune will not – or should not – significantly impact behavior of those thinking about selling other private stocks.
The reality, however, is that public investors yesterday used LinkedIn as a proxy for all the other Internet companies that are not yet listed. In trading up LinkedIn, they were indicating an interest in buying shares in companies like Zynga (and maybe Yandex, which will be the next big Internet company to go public, albeit not one based in the U.S.).
The private secondary markets have served a very important purpose for Internet companies. But it’s possible that they’ve just been disintermediated by public froth…