Bankers: Valuations for Pre-IPO Tech Firms Too High

NEW YORK (TheStreet) -- Facebook, Groupon and Zynga are creating an investor frenzy around high-growth Internet companies while commanding sky-rocketing valuations. But are the valuations for these pre-IPO companies justified?

Maybe not, says a new report by accounting and consulting firm BDO USA, which found that 75% of capital markets executives at investment banks believe that the multi-billion dollar valuations for many private companies are too high.

Zynga's valuation has been pegged at $10 billion

Facebook, reported to be exploring an IPO for next year, could see its valuation top $100 billion, according to reports.

Groupon and Zynga are also planning public offerings featuring valuations as high as $30 billion and $10 billion, respectively.

Other tech companies with reported billion-plus valuations include micro-blogging site Twitter, daily deals company LivingSocial, mobile payments company Square and travel site Airbnb.

About 62% of bankers also believe the tech industry may be entering into a new dot-com bubble, similar to what they experienced in the 1990s.

"We were surprised about concern over a bubble," said Lee Graul, a capital markets partner at BDO USA. "While the companies today have real revenue, customers and profits, we think the term 'bubble' may reflect the limited life of investments today, meaning they're pricing themselves out of the market when they come out."

According to the report, the main contributors to inflated valuations include increasing demand due to a scarcity of shares in pre-IPO markets, the growth of the Internet, the businesses' profitability and strong performance from recent public offerings in the space.

Business social network LinkedIn(LNKD), which went public in May, saw shares more than double in its first day of trading. The stock is now trading at around $100, significantly above its offer price of $45.

Similarly, Russian search giant Yandex(YNDX) saw shares pop more than 40% on its U.S. trading debut.

Bankers were conflicted, however, about the effect of secondary exchanges like SecondMarket and SharesPost, which allow investors to buy and sell shares of private companies.

While more than 79% of bankers feel private marketplaces are having a positive influence on the U.S. economy, 71% believe the small number of trades on these exchanges contributes to overheated valuations.

--Written by Olivia Oran in New York.

>To follow the writer on Twitter, go to http://twitter.com/Ozoran.

>To submit a news tip, send an email to: [e-mail].

>To order reprints of this article, click here: Reprints