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The Rise and Fall of

Its stellar debut set a new standard for Net IPOs, but the sector may now be following the stock south.

It symbolized the rise of the Internet IPO market. Now it could symbolize its decline.

Back in November,


kicked off the latest cycle of Net IPOs with an

astonishing performance on its first day of trading. The New York-based Internet community site, priced by underwriter

Bear Stearns

at $9 a share, traded as high as 97 and closed at 63 1/2 -- a jump of 606% for its debut. (The company has since split its stock.) Coming just two days after information technology Web site



stock had jumped 248% on its debut,'s success kicked off an uninterrupted Internet public offering party. Since then, Net stocks that double on their debut -- and inexorably rise afterward -- have become almost routine.

Until now. With several recent Internet IPOs trading near or below their offering price, youthful Net stocks are no longer the market's darling. Even stocks of relatively more established Net companies are suffering; since peaking on April 24, Internet Sector Index

is down 33%, and numerous high-profile stocks are well off their highs. But in the past month, few stocks have fallen more quickly than, which is once again providing clues to the direction of the Net IPO market. After peaking at a split-adjusted 48 1/2 April 9, the company has lost about two-thirds of its market value, closing Tuesday at 16 11/16, down 7/8.

Who's to blame?

Daytraders, says The same people behind the rise of's stock are now behind its fall, say co-CEOs Stephan Paternot and Todd Krizelman. "In many cases, unfortunately, it's the daytraders who make these stocks fluctuate wildly," Paternot says. "It's not that there's been a sudden, massive loss of value."

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Paternot and Krizelman see a clear dichotomy between institutional investors and retail owners of the stock. Typical institutional investors listen to the sell-side analysts following the company, look closely at financial projections of the company's growth and give thumbs-up to the company's quarterly results. Institutions are buying more stock in, say Paternot and Krizelman, which raised $120 million in a secondary offering last week. Institutions "are buying in because they believe in the fundamentals of the company. ... There's a huge long-term growth story," Paternot says. "It's not like when you finish the secondary, the stock is going to pop up," adds Krizelman. (Though perhaps the institutional appetite for's stock diminished in the days preceding the secondary; citing "market conditions," cut the planned offering of 8 million shares to 6 million shares.)

But not much of the company's stock has been institutionally held -- less than 5%, according to


, though that number likely changed with the secondary offering. That leaves daytraders in the driver's seat, say the co-CEOs. "Mass, hysterical" investors is one way Paternot describes them. If you read online postings, he says, you get the feeling that some of the traders "are buying and selling almost based on voodoo magic." Says Krizelman, "Although they have the power to control the markets, they don't have the information."

It's ironic. A company that facilitates online communities attributes its suffering to the online community of daytraders. Paternot doesn't see it that way, though. "It's not really an irony," he says. "Community has always been there -- when stocks have been going up, and when stocks have been going down."

Now he says the Internet IPO game is over. "It's almost like everybody rushed the candy store, and everybody got a little sick," Paternot says.

So why has been hit so hard this past month? Paternot says he doesn't know. "I wouldn't think there's extra value being taken out of communities

Web sites in particular," he says.

Alexander Cheung, portfolio manager of the


Monument Internet Fund, says he doesn't see the drop in or other content companies, such as



, as being related to specifics. "It's more like cash-flow driven," he says. "These stocks came in probably at a very auspicious time, and market reception was tremendous." The fund doesn't have a position in

Though some investors suggest that advertising-supported Net stocks were getting hit worse than e-commerce companies, Steven Appledorn, a co-manager of the

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Munder NetNet fund, disagrees. "I don't see any pattern here," he says. The fund was a holder of as of May 10.

Despite its troubles, stock is more than triple its split-adjusted offering price of 4 1/2. Other recent Net IPOs haven't fared as well;



, which went public earlier this month at 12 and rose to 16 3/8, closed Tuesday at 7, down 1.

OneSource Information


, a provider of financial information went public last week at 12 and rose to 16 15/16 but closed Tuesday at 9 1/16, down 1/4.

The market "fluctations are out of our control," Paternot says. Instead of dwelling on the stock movement, the two co-CEOs say they're working on improving the company's revenue, building its community and cutting strategic deals.

"We do that, and this company will be successful," Krizelman says. "Steph and I aren't in this to get through this week, you know?"