Groupon and Zynga were worst big Internet IPOs

SAN FRANCISCO— While Alibaba and Facebook shares plunged the most in market value during their first year of public trading, among the five largest Internet IPOs of this tech boom, the worst percentage losses befell investors who bought shares of two much-smaller offerings.

With first-year stock plunges of 85% and 74%, respectively, Groupon GRPN and Zynga ZNGA earned the dubious distinction of being the worst-performing IPOs within an all-losing group.

As we reminded here last week, Facebook’s stock FB dropped 31% in the 12 months after its IPO, while Alibaba’s BABA fell 30% and Twitter’s TWTR, 9%, as measured from the closing price on its first day of trading to its close one year later.

In all cases, the broader market for tech stocks, as represented by the Nasdaq Composite Index, surged in the comparable one-year periods after these IPOs came to market.

Alibaba cements reputation of big tech IPOs as portfolio dogs

These offerings that lost money— for professional money managers and mom-and-pop investors alike even during a tech bull run — are a reminder of a truism of stock markets everywhere:

Insiders know when to sell.

On the other hand, retail investors don't know when to buy— as they’ve proved in previous booms from 16th-century tulips to turn-of-the-millennium dotcoms.

That certainly was the case with Groupon and Zynga.

Each startup company built an Internet-based service, one for daily coupon deals and one for social games, that attracted tens of millions of users.

Yet neither Groupon founder and former CEO Andrew Mason nor Zynga founder and CEO Mark Pincus was able to make their services the basis of a consistently-profitable public company.

On its first day of public trading in November, 2011, Groupon closed with a valuation of $12.5 billion, after raising a $700 million IPO. Today the company is valued at $2.3 billion.

One month later, Zynga raised $1 billion in an offering that valued it at $7 billion. It’s now worth $2.2 billion.

Their inability to turn popular products into successful businesses – and oversee a huge destruction of shareholder wealth during their tenures — didn’t prevent both entrepreneurs from cashing in.

Indeed, as I wrote in March, 2011, executives and early investors were shedding their stakes in their Internet startups well before they went public.

This may have been the key fact missed by retail investors who piled into these stocks too late: A huge chunk of the proceeds from their late-stage private rounds went not into the company’s coffers but rather were used to cash out insiders.

The first paragraph from that story four-and-a-half years ago still holds true:

“Early investors and executives of the hottest Internet startups know something that retail investors hoping to get rich on their expected IPOs may not: A sizable chunk of the value in companies such as Facebook and Groupon has already been cashed out.”

That was before the Securities and Exchange ordered Groupon to amend its IPO filing multiple times in the second half of 2011, due to its questionable accounting for the payments made to merchant partners.

It was also before Zynga’s IPO dropped 10% on its first trading day, from $10 a share to $9, in an ominous sign.

The shares would keep dropping throughout most of 2012, but not before the company’s bankers managed to sell a large secondary offering at $12 a share.

All of the proceeds of that share sale of $515 million – which further diluted the stakes of retail IPO stock buyers, and significantly so —went to Pincus and other Zynga insiders, according to a Zynga SEC filings.

None of the money raised in the offering was invested in the company’s operations, and within a year of its IPO, Zynga began shutting offices and laying off workers.

This week its shares are trading around $2.30 apiece, or 81% below the price of that secondary offering.

Here are links to the other two columns in this series:

Facebook showed tech IPOs are a zero-sum game (Investors always lose)

Wall Street didn't ruin Twitter, but it didn't help

John Shinal is a columnist for USA TODAY. You can follow him at @johnshinal.