The conventional wisdom about the IPO market holds that only a big, splashy IPO from a company like Google will be able to pry open the IPO window, paving the way for other, smaller technology companies to raise money from investors. From this perspective, the IPO window is exactly that -- a window -- that is open, shut or wedged partly open (but not wide enough to allow technology companies to escape into the market). Invariably, analysts, pundits and market watchers point to the success of blockbuster IPO deals such as the Netscape IPO in August 1995 or the eBay IPO in September 1998 as classic examples of the types of companies that can force open the IPO window. Google certainly fits that definition -- it is a profitable company with a real product in a hot industry niche and has been universally acclaimed by investors, media pundits, and just about anyone with access to the Internet.
is there another way to think about the IPO market? When Malcolm
Gladwell published "The Tipping Point: How Little Things Can Make a Big
Difference" in 2000, it became an instant classic and a powerful tool
for understanding how trends start, persist, ripple outward, and
achieve wide-scale prominence. The key is to think in terms of "social
epidemics" and how ideas, messages and human behavior can mix together
to form potent social cocktails. At the start of any epidemic, there
exists a "tipping point" -- the moment when an idea or disease or trend
reaches critical mass and enters the public consciousness with a
ferocity that often leaves people scratching their heads: "Where did
that come from?" The book convincingly argued that a number of
epidemics -- the spread of HIV, the rise in the
those unfamiliar with Gladwell's arguments, consider the success of
films such as "My Big Fat Greek Wedding." The film had little in the
A "hot" IPO market is similar to a new trend or bestseller that catches the public's fancy. Financial markets are not always rational. They are prone to bouts of "irrational exuberance" and other phenomena well documented by behavioral finance theorists. In the wake of the dot-com crash, investors have suddenly rediscovered writers like Charles MacKay ("Extraordinary Popular Delusions and the Madness of Crowds") and Charles P. Kindleberger ("Manias, Panics and Crashes"). Oh, yeah, maybe markets are not always rational. Maybe there are sometimes powerful ideas that sweep a market like, well, an epidemic.
Interestingly, there have been a number of highly acclaimed IPO deals over the past 18 to 24 months that have failed to open the mythical "IPO window." Moreover, investment bankers have withdrawn a number of deals from the IPO pipeline, claiming, "The window is not open yet." Why did Loudcloud fail to wedge open the IPO window in 2001? (After all, the co-founder of Netscape, Marc Andreesen was also the founder of Loudcloud.) Why did the blockbuster $870 million Seagate IPO in December 2002 fail to jump-start the IPO market? Why did LeapFrog Enterprises or Plumtree Software fail to excite the market in 2002?
For that matter, why have recent IPO deals from FormFactor, InterVideo and Digital Theater Systems failed to generate the familiar IPO buzz thus far in 2003? The conventional wisdom holds that these companies were not big enough, sexy enough or profitable enough to open the IPO window. Market watchers also point to the "lack of a pipeline" for new IPO deals. Yet, at the time of the eBay IPO in 1998, the IPO pipeline was looking a bit rusty. In September 1998, there were only 11 IPO filings, compared to 36 in August 1998 and 47 in July 1998.
Maybe there is a better explanation -- the "IPO contagion" has not yet incubated itself. The tipping point has not yet been reached. Sometimes it takes a while for a virus or epidemic to grow in strength. (In Gladwell's parlance, there must exist an array of connectors, mavens and salesmen before an idea or trend can have a tipping point.)
So, is it possible to "tip" the IPO market? Is there a point when the IPO market will rebound with a ferocity and intensity that will leave market watchers scratching their heads and wondering how they possibly could have missed the return to health of the technology sector? The "tipping point" could be the arrival of smaller, unheralded technology companies that have carefully built a network of loyal, informed users, that have attracted the attention of some underground Web sites or media publications, and that are well-esteemed by venture capitalists and investment bankers. (These three groups correspond to the mavens, connectors and salesmen described by Gladwell.) When the technology sector can produce these types of companies in size, then the IPO market is ready for its "tipping point." A Google IPO would be most welcome, but one company may not be enough to start an IPO epidemic.