Wednesday, May 25, 2011

One-a-Days III: One for the MBA's

After a summer in San Francisco I've become a little more watchful of all things tech and startup in the bay area. Partly it's a search for jobs but partly it's also a chance to keep the pulse of what's going on in the world of innovation.

It should come as no surprise then that I have been all over the recent IPO of LinkedIn. Most of San Francisco and much of the world is curious to see what will happen with the new wave of social sites and their promise of changing the world for the better. But how do you put a price on changing the world?

That's the challenge an IPO for a company like LinkedIn faced last week. How to price a security for something that no one really knows how to value. So what happened? Well, the initial offering came in way below way investors were willing to pay, LinkedIn probably got screwed out of a big chunk of change, friends of the investment bank handling the offering made a killing, and everyone rushed in to get a piece of the social media action.

Honestly, this whole flub of an IPO didn't really disturb me that much. From all I've read, IPO's are generally a cluster fuck no matter what company and I bank you are talking about. What worries me far more is the discrepancy between what investors in the 'private' secondary market (somewhere around $20-25)  were willing to pay compared with what those in the public exchange were willing to pay ($80+). What this shows me is that there really no way to assign a proper valuation to a social network. We are mostly shooting blind. And for some reason, unlike the real world where people will pay less for something they don't understand, in the markets people often pay more. Suddenly a new tech bubble starts to look a hell of a lot more likely.

When was the last time people were buying and selling commodities that they couldn't accurately price? How about in 2008 when mortgage-backed securities kicked off an economic tailspin that is still reverberating through world markets. Do you think the banks that bought these securities would have done so if they had any way off accurately pricing a whole host of mortgages, each tied to individuals' homes (rather than homepages) but bundled together in some strange web where a value had to be assigned to the whole package taken together?

Sure, this may be a ridiculous oversimplification, but tell me, how much are you and your social network worth? I think we all can agree that it's worth something, but no one knows how much. It's crazy to think we can put an accurate value on a site like LinkedIn so soon. Social media is still in its infancy and there's no telling where it will end up tomorrow, or next week or next year.

If you like to gamble, go ahead and grab a few shares. As for me, I'm going to keep buying objects and stocks I can value. Come to think of it that $3000 bike doesn't sound so ridiculous after all...

Back to the fun tomorrow.

1 comment:

  1. I would recommend reading "The Big Short" by Michael Lewis. It is a fantastic, fascinating read that makes the whole 2008 housing bubble/crash come alive through stories. Not completely relevant to what you wrote, but kind of...