IPO investors treated the debut of technology company Loudcloud Inc. the same way Seattle residents eye a storm ? do we really need another one?
An Internet software and services provider, Loudcloud was the most anticipated public offering so far this year, largely due to its pedigree. The company is the brainchild of Marc Andreessen ?the brash techie behind Netscape Communications. Andreessen garnered investor interest with his entrepreneurial prowess and bold statements like “Someday, Windows will just be a poorly debugged set of device drivers running Netscape Navigator. And all the users will know about is Navigator, and all the developers will talk to is Navigator.”
This time around, however, the market has left Andreessen little to boast about, as the Loudcloud IPO had a rather dismal first day of trading, and its sluggishness continued as Private Equity Week went to print.
After slashing its per share price to $6 from $8-$10, Loudcloud opened down on March 9 at $5.75. Eventually the offering mustered enough strength to close at $6.16.
In all, the IPO raised the intended $150 million, but in order to do so, it had to up the number of shares offered, to 25 million from 10 million. As a result, Andreeseen?s stake in the offering was cut to less than 12% from 18%.
But Andreessen fared far better than Loudcloud?s late-stage venture investors did. Capital Research & Management, Charter Growth Capital, Amerindo and Octane paid $17.06 for each of their shares at the time of Loudcloud?s last round of financing in June 2000, according to documents filed with the SEC. Their paper losses range from $6.39 million to $12.78 million, based on Loudcloud?s price at the close of its first week of trading.
The hype around Loudcloud apparently stemmed more from its association with Andreessen than anything the company had to offer investors. Loudcloud lost $50 million last year and reported a revenue of just under $2 million.
One late round investor, who declined to be named, noted that it was an accomplishment that the deal was pushed out at all and went on to note that after the six-month lock-up period most VCs are not expected to sell.Despite the lackluster opening price, not everyone was hit too hard in the pocketbook. Menlo Park, Calif.-based Benchmark Capital paid just $1.68 for most of its shares. Moreover, Andreessen had carved out his shares of the company at a miniscule $0.16 a pop.
Based on Loudcloud?s closing price at the end of the week, the company had a 38% drop in its $727 million market valuation it had last summer, according to our VentureXpert database.
By the end of its first day of trading, its market value had dropped to $451.5 million.
Loudcloud Doesn?t Speak For All Infrastructure Providers
In a not-often-seen collaboration, Goldman Sachs and Morgan Stanley Dean Witter acted as joint leads on the deal.
The investment banks apparently hoped to awaken the taste buds of IPO investors with the lure of a promising technology offering. Investors, though, didn?t buy it and treated the IPO as yet another unproven technology product from a company with large losses and no profits.
But what does this say about the promise of the Internet infrastructure sector?
To Sateesh Andra, president of Euclid, a Santa Clara, Calif.-based infrastructure service provider ? and Loudcloud competitor ? it says investors might be too overly cautious on a sector virtually guaranteed to offer substantial growth.
“It tells me they?re more pessimistic than they need to be,” said Andra. “Our market is still in its inception space and there are no clear leaders yet. We haven?t seen much of a downturn, although the decision-making cycle is a little longer.”
With a growing customer base and $20 million in VC funding, Euclid is in better shape than some IT companies. What Andra wants to make clear, however, is how these services are created and delivered to clients needs to be distinguished. Euclid may operate in the same arena as Loudcloud, but their approach is completely different. And that, Andra hopes, is how investors both public and private, should establish their valuations.
Although admittedly contrived from the point of view of a competitior, Andra speculated the Loudcloud?s stock price woes might be linked more to its business model than investor distaste for infrastructure.
“They use proprietary software. Basically it?s a capital-intensive model with very limited flexibility,” Andra said of Loudcloud. “When you look at the model there, and the amount of money they have burned through, and consider its path to profitability, that scares anybody.”
Colleen Marie O?Connor can be contacted at Story Feedback.