Internet & Tech

Think Facebook, China-style

IPO glitches don’t stop Renren pulling off hugely successful fundraising

IPO hiccups: Renren’s Joe Chen

In their dealings with venture capital firms, the owners of some of the internet’s most popular social networking sites have often adopted a cavalier attitude.

Mark Zuckerberg set the tone. Visiting Sequoia Capital, the Facebook hotshot deliberately turned up late at the VC’s Menlo Park offices – and in his pyjama bottoms. He then gave 10 reasons why they should not invest in his firm, which must have been an unusual pitch for some of Silicon Valley’s most seasoned investors.

Even when Zuckerberg spoke to Accel – whose money he actually wanted – he still showed up in shorts, T-shirt and Adidas flip-flops.

But when it comes to the public equity markets that dressed-down mood tends toget rapidly replaced with one of well-tailored suits and strenuous handshakes.

The demands of the regulators and the investor community, plus the sudden proximity of a shedload of new cash, usually serve to lock company owners into a much more formalised process in which the prospectus is a sacrosanct document and lawyers become serious.

So when China’s equivalent of Facebook launched its own IPO this week, few had expected the colourful events that would accompany its own roadshow.

Not only did Renren end up on the front page of the Financial Times after filing a dramatic late addition to its prospectus. But on the eve of its Nasdaq listing the social networking site also grabbed attention by replacing an independent director, who happened to head its audit committee.

The changes in the prospectus related to an acknowledgement that Renren had wrongly stated the number of its new users in the first quarter this year. A filing back on April 15 had said monthly active users had increased by 7 million in the first three months to 31 million. This figure had “raised eyebrows,” reported the FT, because it suggested much faster growth than the company had previously suggested.

However, Renren later filed a revised figure saying that the number had been overstated by 2 million, thus reducing the quarterly growth rate by more than a third (albeit to a still healthy 19%).

According to the Wall Street Journal the company claimed it was all a typographical error.

Then on Monday, another twist. This time the SEC filing related to an announcement that the director heading the audit committee, Derek Palaschuk, would be replaced by David Chao.

The timing was unfortunate, and had less to do with Renren than Palaschuk’s role as CFO of Longtop, a Chinese software company embroiled in an accounting controversy. He said he had resigned “to protect Renren”.

Even more amazing: none of this seemed to matter at all!

Such is investor enthusiasm for Chinese internet stocks at the moment that neither of the two hiccups, or ongoing questions about Renren’s ‘monetisation’ model, nor a hike in the price range (from $9-11 to $12-14) did much to dent demand.

In fact, on Wednesday, the stock surged 29% on its first day of trading, closing at $18.01. Bloomberg calculates that Renren – headed by founder Joe Chen – raised $743 million in the IPO and did so at a valuation “more than double that of Facebook”. The stock was priced at a massive 72 times last year’s revenues (yes, not profit). WiC has written before on whether China has an internet bubble (see issue 98). In this particular case Bloomberg quoted a fund manager from IPOX Capital with his own take on the question: “You can say Renren’s overvalued, but people are going to buy it anyway. The growth is there, and you’re paying for it big-time.”

Keeping Track: Recently listed social networking site, Renren announced last week that it made a first quarter loss of $2.6 million on revenues of $20.6 million. That was actually a better result than previously. Sales jumped 46% on the same quarter last year and the loss was 78.5% lower than in the comparable period. The firm also forecasts its  revenues will hit $30 million in the April-June quarter. But, no matter. The news failed to stop a slide in Renren’s stock price, which has fallen about 50% since its IPO in May (see WiC105).(24 June 2011)

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