When Valuations Don't Mean Valuable - Tony Greenberg-RampRate

It39s Time For A New Wave Of InvestingquotYou39re walking around blind without a cane pal A fool and his money are lucky enough to get together in the first placequot amp8211 Gordon Gekko in quotWall StreetquotA week before Groupon39s initial public offering Henry Blodget at Business Insider was telling readers he wouldn39t touch it with a 50foot pole for reasons that amounted to quotIt39s an insider39s gamequotAs Blodget expected insiders were indeed the big winners Investors who bought at the peak that opening day are now down about 20 percent since then The only good news for investors at least they39re not in the territory of Demand Media which now trades about 70 percent below its first day of trading back in JanuaryInvesting in IPOs today screams quotcaveat emptorquot But do we listen The prospect of investing in something that all our friends are using seems to be as irresistible as supersizing a fastfood meal amp8212 and can be equally bad for our fiscal healthThere39s also the view that if people are buying things they don39t understand they should lose their money It39s called capitalism redeploying money to smarter people so it can be invested more intelligentlyBetter Ways to InvestI agree that capitalism should not reward stupidity but we also should make it a little safer for noninsiders to invest Why not increase transparency and let outsiders see what39s really going on in a companyPerhaps it39s time for the equivalent of nutritional content labels on investments that outline in plain language just how much risk we39re taking And maybe it39s time we also start asking if there are better ways to invest not just for us but the health of our planet That39s happening now with a growing trend called quotimpact investingquot defined as forprofit investment made to solve social and environment problemsquotImpact investing will need to scale to an enormous level for these solutions to be achievablequot said Eric Kessler founder and principal at Arabella Philanthropic Investment Advisors which advises philanthropies like Gates Foundation and Rockefeller Foundation and touches nearly 1 billion in grant and impact investment portfolios a year for quotProfitable sociallydriven businesses are the only sustainable solution Philanthropists are awakening to that now and transforming themselves into impact investorsquotAs things currently stand it39s turned into a bit of the Wild West for investors In an era of Occupy Wall Street and too many investing scandals the impulse is to blame fraud or at least insiders who take liberties at the expense of the rest of usTrue neither Groupon nor its underwriters held a gun to anyone39s head to buy a single share Key information from insiders taking money out to decelerating revenue growth was thoroughly and publicly documented as per all SEC regulations and rulesBut months before Groupon went public breathless news stories were estimating a 25 billion valuation for the site By the time the IPO put real numbers on those estimates Groupon was valued at 13 billion instead but even that seems optimistic for an unprofitable company founded three years agoSkyHigh ValuationsGroupon is not the only example of misplaced quotIPOptimismquot Zynga the online game company was reportedly seeking a 20 billion valuation It now expects to go public with an estimated value of about 14 billion though some seasoned analysts think 5 billion is more realistic Facebook valuations currently range from 60 billion to 80 billion up from 500 million just four years ago though the social media behemoth has yet to announce when in 2012 it may actually go publicAsk a venture capitalist about these skyhigh valuations and their response ranges from a shrug of their shoulders to a gleam in their eye The bottom line though is they don39t know what to think This is uncharted territory with companies only a few years old riding huge valuations to ridiculous riches at least for a fewquotThe biggest risk I see in todays extraordinary Internet company valuations is the short length of time these companies have been in businessquot said William Edward Quigley cofounder and managing director of Clearstone Venture Partners quotThe longer a company has been operating the more secure its competitive position in the market and the more predictable its revenues Predictability is a core ingredient in successful public companiesquotQuigley points to LinkedIn which went public after a full decade of operations with a seasoned executive team strong internal and financial systems and a proven business model Groupon by contrast has had none of those advantagesquotA pubic investor should be more cautious when investing in companies that are still figuring out their businessquot Quigley saysIPOs Hit The SkidsThis brings us back to what we are investing in and whether those investments are wise One recent report looked at the dismal performance of new companies in the IPO market During the past 15 years the number of young companies entering capital markets through IPOs has plummeted relative to historic patterns hobbling job creationThe report quotRebuilding the IPO OnRampquot also had a number of recommendations including the need quotto improve the availability and flow of information for investorsquotRegulations have driven up costs for young companies looking to go public the report says At the same time institutional investors are leery of buying stock in startups because their risk levels are much higherquotRight now there is very little capital available to these emerging companiesquot said Wall Street investor Terren Peizer chairman of Socius Capital Group Peizer said more than 4000 publicly traded companies have market capitalizations of less than 300 million each Companies that small just aren39t attractive to choosy institutional investorsquotThese companies are unable to attract capital on viable terms if at allquot said Peizer quotIncreased regulatory pressure has had the unintended consequence of choking off capital access for the small companiesquotquotIn today39s regulatory environment it39s virtually impossible to violate rules amp8230 and this is something that the public really doesn39t understand It39s impossible for a violation to go undetectedquot Bernard MadoffAll of this leads me to hope there will be a greater emphasis on impact investing which may be help resolve these problemsThe Rockefeller Foundation started looking at these issues in 2008 when it developed a set of guidelines for quotImpact Investing and Investment Standardsquot or IRIS As part of the process the foundation developed a common reporting language for impactrelated terms and metricsOut of IRIS came the Global Impact Investing Network Investors39 Council GIIN was set up to identify how investor funds define track and report the social and environmental performance of their capital in a way that39s transparent and credibleIn my company which deals with similar issues of managing risk in an opaque environment I39ve learned that it39s not about making a single right decision Instead it39s about hedging diversifying and understanding your risk vs reward It39s also about doing what39s rightSo much of what39s wrong with the investing picture today stems from the basic human impulses of fear and greed People are afraid they will miss out on something big which is the attitude that helped puff up the housing bubble And that fear leads to greed as people pay big bucks now hoping to reap huge returns laterPerhaps it39s time we put fear and greed back into the bottle and focus on how to invest for a better tomorrow that makes all of us winnersAs CEO of RampRate Sourcing Advisors and DeepStrat Tony Greenberg has been an idea generator transforming perceptions and industries since he was 17 Under Greenberg39s leadership for more than a decade RampRate has radically changed how IT services are purchased creating actionable datadriven sourcing information that has saved tens of millions of dollars and thousands of hours of headaches for major clients in entertainment Internet services finance media and video games DeepStrat a spinoff from RampRate39s strategic research arm focuses on growthadvisory services for companies in the digital media value chain particularly in mergers ampamp acquisitions rampups and funding plansRead all Tony39s MediaBizBloggers commentaries at Only Time Buys TrustCheck us out on Facebook at MediaBizBloggerscomFollow our Twitter updates MediaBizBloggerThe opinions and points of view expressed in this commentary are exclusively the views of the author and do not necessarily represent the views of MediaBizBloggerscom management or associated bloggers MediaBizBloggers is an open thought leadership platform and readers may share their comments and opinions in response to all commentaries

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