NEW YORK It had all the signs of another dotcom bubble: A start-up without a convincing business plan or any foreseeable chance of turning a profit saw its shares soar in the first hours after its stock market debut.
The difference this time -- one that cost some investors money but provided a measure of relief to anyone worried about an overheated IPO market -- is that shares of Pandora Media Inc quickly went south.
Two days after Pandora's stock debuted, it had handed back all its gains and was down nearly 20 percent from its IPO price of $16. While Pandora raised $235 million in its offering, any of the investors that bought shares at the IPO price or higher are now suffering losses -- a tough lesson in jumping into the dicey IPO market.
And Silicon Valley seems just fine with that. Not due to Schadenfreude within the venture capital and start-up worlds, although surely some exists, but rather because it demonstrated sanity in the markets.
"Pandora showed that if you're still trying to figure out your business model and you go public, then the market is going to call you out on it," said Bruce Taragin, managing director of Blumberg Capital. "I'm pleased there's no irrational fervor in the marketplace."
Pandora, an online music service, is not alone. Its rise and fall just happened at a stunning speed.
Shares of LinkedIn Corp and China's Renren Inc, social networks that debuted in May, also reversed course after strong debuts. It just took them a bit longer. Today, LinkedIn is still above its IPO price but is down 45 percent from its highs, while Renren has lost half of its value since its IPO.
For the Chinese Internet companies there has been a double dose of bad sentiment to deal with. A series of accounting scandals at Chinese companies listed in North America has led to a loss of confidence in the sector generally.
Josef Schuster, founder of Chicago-based IPO research and investment house IPOX Schuster LLC, said the pullback from Pandora and others is "a healing process" that should help the technology IPO market in the months to come.
NO PROFIT? STAY HOME
Indeed, the road ahead looks quite crowded for technology start-ups that want to go public. But for now it may be too early for judgment since only a clutch have made their public debut.
"Right now it's just a handful of companies," said Eric Hippeau, a partner at Lerer Ventures. "It's not the best way to indicate where the market is going."
That should change in the coming months. Groupon has filed for an IPO, while Zynga and Twitter could also announce IPO plans. Facebook would be the most anticipated, considering it has 500 million users and this year could produce what one researcher estimated would be $4 billion in ad revenue.
"For the market as a whole it's actually going to be quite good," Schuster said of the Pandora debut. "You will see Groupon being much cheaper, you will see Zynga being much cheaper. I think it's going to have a big influence on the Facebook valuation as well."
The trouble with Groupon and many others lining up for IPOs is that they aren't turning profits. Groupon posted an operating loss of $117 million in the first three months of the year. In its IPO filing, Chief Executive Andrew Mason said the company does not value itself in a conventional manner and suggests other ways of looking at how much Groupon is worth.
Pandora, for its part, has never turned an annual profit.
"What we thought before when you couldn't do an IPO is still true: If you are losing money, don't go public," said Todd Dagres, general partner at Spark Capital.
The question is whether Pandora will serve as a cautionary tale for super-hyped start-ups and those investors willing to overlook doubtful business plans to get a piece of the action.
"Everybody wants to invest in Facebook but they can't," said Dagres, citing a "halo effect" surrounding social and new media. "Other companies are riding that wave that are not leaders in the category and don't have long-term advantages. The reason is because there is a premium for growth."
Perhaps the rush to sell shares to the public and raise money is sensible, considering how much uncertainty surrounds the housing markets, employment and fears about debt troubles at home and abroad.
"Now is a great time to raise money, A lot of times smart entrepreneurs are raising perhaps a little bit more than they think they need because they recognize that it may not last forever," said Paul Buchheit, a partner at start-up accelerator Y Combinator and former Google engineer.
"I'm not worried about a tech bubble. I'm worried that the entire economy may be a bubble," he added.
Others, of course, say the IPO market is on solid footing and that much of what happened with Pandora is a pricing issue that will be sorted out with public offerings over the coming three to six months.
"I don't feel we're in a bubble, I feel that strongly," said Sandy Miller, general partner at Institutional Venture Partners, an investor in Twitter and Zynga. "We're in the early stages of an IPO market, which I think will be sustainable for some period of time."
In a sign of how much market sentiment has shifted in only a few months it is worth recalling the complaints from one executive that Morgan Stanley had underpriced his company's offering.
Li Guoqing, the chief executive of E-Commerce China Dangdang in January ranted publicly on a Chinese Twitter-equivalent that he thought Morgan Stanley had priced the shares of his company too low.
"I regret not giving the share offer to Goldman Sachs," Dangdang's Li wrote on the Weibo microblogging site. "I'm openly criticizing investment banks, including Morgan Stanley."
Dangdang's shares, which shot up 87 percent on their first day of trading are now at $11.50 -- which puts them 28 percent below the IPO price that Li complained about.