The IPO Market's Post-Facebook Reality

NEW YORK ( TheStreet -- The IPO world is now divided like an ancient calendar of history -- between the BF period - that is, Before Facebook ( FB) -- and the AF - that is after the IPO cataclysm. In the earlier period, BF, the fantasy of overvaluing Internet stocks was alive and well. After Facebook? Well, reality bites.

In that fuzzy and warm pre-Facebook era, you could highly price an Internet company like Zynga ( ZNGA), a gaming company associated with Facebook, at $10 billion in value when it went public. The reality of the market now puts it at a more realistic $2 billion.

Other companies are now suffering the post-Facebook reality check. LegalZoom, for instance, is making an AF market debut. Had the company jumped into the public market a few months ago, it probably would have commanded the price it wants. Not so now.

LegalZoom is hoping to price its offering in the range of $10-$12 a share, which values the company at 40x last year's earnings. At the high end of the range, that gives LegalZoom a valuation of $483 million. The company did log revenues of $156 million in 2011, but only booked net income of $12 million.

LegalZoom is a leading online source for legal documents, but it does not provide legal services. The company recently began to promote a subscription service, presumably to smooth out its earnings. Unfortunately, it hasn't been able to demonstrate a consistent profit stream.

The positive takeaway with LegalZoom is that it is a growing company whose sales have increased and whose losses have been trimmed. It has also taken very little in outside cash, which is impressive.

The market though is concerned that the offering seems to be primarily a way for the existing shareholders to bail out at the expense of new investors. More than half of the stock in the offering is coming from existing shareholders. If they aren't sticking around, why should a new investor jump in?

E2open ( EOPN) has also learned the perils of the after market. This cloud company priced at $15 on July 26, but immediately traded down.

"I think our investors are looking at where we are going to be in the future," Mark Woodward, the company's CEO, told CNBC, "not necessarily where we are trading today."

But initial valuation of the company at $442 million looks inflated when you consider this disclosure in its filing: "Throughout most of our history, we have experienced net losses and negative cash flows from operations." The company only booked $56 million in revenue last year. LegalZoom starts to look pretty good compared to that.

Meantime, Avast Software saw the dark clouds gathering for cloud companies and withdrew its IPO altogether. Avast is a popular security software and its planned pricing was aiming for a valuation of more than $800 million. It produced only revenues of $91 million last year and net income of $27 million.

It seems the cloud companies have to go back to the drawing board for their price valuations. Take a lesson from the pharma companies that have gone public lately. Price low and then you have somewhere to go. The market will perceive your deal as a bargain.

Hyperion Therapeutics ( HPTX) priced its stock at $10 on July 26, below its planned range of $11-$13. The stock is already in positive territory. Supernus Pharmaceuticals ( SUPN) priced at $5 and the stock is up 157%. It was originally looking at a range of $12-$14.

Also, what if we change the way we look at LegalZoom? Instead of thinking of it as tech offering, let's think of it as a consumer service company, like Kayak ( KYAK). On Kayak consumers walk away with something in their hand -- an airline ticket. On LegalZoom they walk away with a document like a will. Kayak is up 29%.

So let's price it like a pharma and call it a consumer service company. That approach might set LegalZoom up for a successful offering.

Unless they get creative, digital companies going public in the post-Facebook era will be fighting against the unforgiving forces of marketplace.

-- Written by Debra Borchardt in New York.

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