Phil Black, a founding partner of True Ventures, writes this morning about how Zynga IPO price being lower than last private market transactions will impact their investment in the company:
Zynga priced on Friday. Great News! Except now, we have to write down our investment (maybe/probably). How, you ask? Before going public, Zynga traded in the private marketplace around $14 a share and we could mark our price in and around that level. Now, it’s publicly traded at $9.50 a share. Plus, we’ll have to take a further discount to that price because we are locked up for six months or more. I don’t think we are going to be the only group owning Zynga facing that odd situation of your portfolio company going public only to write down your investment!
I don’t think True invested directly in Zynga but rather received shares when their portfolio company XPD Media was acquired. Phil’s comments are interesting – everyone had focused on how it was late stage investors who might be seeing real losses but even earlier money might now be seeing “paper losses” if they were aggressive in marking up valuations based on late funding rounds/secondary sales. A firm needs to manage the expected return of their funds, so trying to properly assess private market valuations is important.
There is a big difference between “losses” and writing down the value on a mark-to-market basis. The latter is the equivalernt of your buying a public stock for $5 / share, it goes up to $50 (you then calculate your paper value) then it goes back down to $35. You might still be sitting on 7x your money! I'm not too worried about Zynga pre-IPO investors
Mark – of course! Interesting though that potentially a larger segment of investors than originally thought had a negative event from the Zynga IPO – if they had carried the stock at the level of last financing.
I would hate to be a True Ventures' LP. Who wants to be an investor in a fund of a firm that does unoriginal investing by trying to follow trends. You can't be a momentum investor in VC. Remember the pre-2000 bubble? Or how about tupils in Holland? Any smart investor will now short the heck out of Zynga.