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Why we shouldn’t blame Wall Street for tech’s poor IPO run

I recently saw a TV interview with Elevation Partners founder Roger McNamee. In it, he lays the blame for Facebook’s IPO drama. I think that’s a load of crock.

McNamee’s claims of a corrupted process for the Facebook IPO, involving NASDAQ and Wall Street firms, seems too perfect an explanation for the flop. The real reason the Facebook IPO failed is much simpler: the “smart money” couldn’t convince the “dumb” money to buy.

Here’s what happened: In every IPO, the early private investors and insiders, try to cash out big chunks to lessen their risks in holding positions in often very volatile young companies.

They have to guess the demand from retail investors, not the institutional investors, they already have that data.

But they guessed wrong, got greedy, and the price wasn’t attractive enough for the “dumb” money, which left the “smart” money feeling pretty dumb, then getting angry and looking for a more face-saving explanation, such as a corrupt Wall Street.

Wall’s Street’s management of the Facebook IPO might be one of the few places where its conduct was totally fine, and inline with prior IPOs. Yet in the Bloomberg interview McNamee cites things such as the pricing of the shares, and the issuing of extra shares prior to the IPO, as being unusual and indicating possible foul play.

The facts are that there wasn’t much unusual at all in what happened. The pricing of the shares was largely based on the valuation of Facebook shares in private markets, in the weeks before the IPO.

It was the secondary markets that essentially set the price of the shares, and this is the “clean” market, McNamee tells Bloomberg TV, while it’s the public markets that are not. So where is the smoking gun here?

Also, it’s not uncommon for underwriters to increase share supply prior to an IPO. The shares come from either the company or private shareholders and insiders, there was no one twisting their arms to sell.

It wasn’t Wall Street greed but Facebook’s shareholders’ greed that toppled the $FB IPO because they agreed to offer more shares, which weakened price support, but offered the sellers a chance to lock-in high share prices.

But the real share price killer is the huge overhang of locked up shares that will be available for trading over the next few months.

More than 1.3 billion new Facebook shares, three times the IPO. Imagine three more Facebook IPOs worth of shares, who will buy them?

The retail investors were smart enough not to buy a hyper-hyped $FB valuation, which is an encouraging sign because it shows that public markets are much more sophisticated than in dotcom boom times, and have learned from history.

There’s no need to accuse any one of fraud or misconduct when there’s far simpler and more obvious explanations for Facebook’s IPO flop. But, it must sting to be not quite as smart as your press releases, and to be caught holding the bag, (yet again).

Author | Tom Foremski: In Silicon Valley

Tom Foremski: In Silicon Valley
Tom Foremski is a former Financial Times journalist and the Founder and Publisher of Silicon Valley Watcher, which is an online news site reporting on the business of Silicon Valley and the culture of disruption. More

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