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Infinera IPO Soars: Why Relational Capital Matters

June 8, 2007 on 1:12 pm | In Company Analysis, Investor Analysis, In the news, Board Member Analysis, IPO |

Infinera shares soar in debut (CNN Money)

Infinera had a 14M share offering with a price range of $10-12, it priced at $13 and opened yesterday at $16.04.  It closed at $19.71 after reaching a high of $21.24 in mid-day trading (low = $16.00).  As a result, Infinera (INFN) was up 52% if you got in at the IPO and up 23% if you got in at the opening bell.  This is particularly noteworthy because the NASDAQ was down 1.77% yesterday.  From the CNN article, independent IPO analyst Tom Taulli states, “In hindsight [Infinera] looks like it was underpriced.”  This hails the sentiment I offered in my March 2 blog post, Infinera IPO Filing: The Juniper Net Works?  Here I was bullish on Infinera because of its relational capital via co-investor ties to 24 public companies and multiple board ties to Juniper Networks.  I repeat two of these maps below:

Infinera Investment Relational Map. Notes: (1) Juniper Networks as both an investor (orange oval) and related company (green box) via Kleiner Perkins & JAFCO; (2) Kleiner multiple public co-investment ties to Venrock (Photon Dynamics, Pharmacyclics, Geron, Echelon, & NeoMagic) & Sprout (Synaptics, Verifone, & eHealth); and (3) 17 investors on the map reflecting 7 rounds of capital ($315M total raised). (Source: LinkSV.com)

Infinera & Juniper Networks Board Relational Map (Pendants dropped).  Notes: (1) Direct tie to Pradeep Singh (Juniper CTO/Founder); (2) Multiple direct ties (Kenneth Goldman, Pradeep Singh, & Vinod Khosla (Former)); and (3) Multiple indirect ties (Alex Balkanski, Reed Hundt, Dan Maydin, & Peter Wagner (Former)). (Source: LinkSV.com)

Two interesting changes on the map occurred since the March 2 post: (1) Reed Hundt (Former FCC Chair) now on the Board of Infinera; and (2) Vinod Khosla (Khosla Ventures, Former KPCB) now a former board member on Infinera.  Such changes are important to note in the days preceding the IPO. 

My main point is that relational capital networks provide valuable additional information for IPOs.  A couple of key factors make IPOs particularly salient for capital network analysis: (1) S-1 filings indicate the actual amounts and percentages of ownership in the company (this becomes public for the first time); (2) Investors and board members care greatly about early-IPO pricings because federal regulations require a lock in period of at least 180 days before such insiders can sell their shares; and (3) When insider shares are sold, they typically trigger immediate market reaction. 

Don’t get me wrong, fundamentals are important in predicting IPO success, but they do not tell the whole story.  Look for key relationships (such as the Juniper tie, public company affiliations, key co-investments, and people ties such as Reed Hundt now on the board) to add to the data gathering process for IPOs.  LinkSViewer maps assist in this process because (1) pictures are quick reads (important in a time crunch), (2) network maps depict relationships in one place (and can be manipulated by the end user); and (3) this information is available much prior to the IPO (known at time of filing).  Realize that our source of data (LinkSV), only reports on (in the most part) Silicon Valley hi-tech companies, investors, and management teams - as a result there may be some missing information.  At the time of IPO, however, any information is golden because of the high level of uncertainty in at IPO.  Pricings factor in fundamentals, but to what extent do they include relationships?  I claim this is a key strategic advantage for would be institutional investors and day traders.  I repeat and expand upon the earlier quote:

“In hindsight [Infinera] looks like it was underpriced,” said independent IPO analyst Tom Taulli. “But it’s tough to get these things right. The market has been down quite a bit for the last couple days, but it really hasn’t impacted high-flier IPOs.”

Two of Taulli’s points are of further interest: (1) “…hasn’t impacted high-flier IPOs” demonstrates how IPO speculation can be used as part of a hedge strategy countering overall market inertia (at least in the current environment) - this was exemplified by the Infinera gain on a bloody market day; and (2) ”…it’s tough to get these things right” underscores the amount of incomplete information associated with an IPO.  More on this last point…reducing uncertainty requires a wide variety of sources such as network analysis in evaluating upcoming IPOs.  For example, I examine the pedigree of co-investors in an IPO company based on the idea that “success breeds success.”  Yet, this type of speculation has garnered some negative criticism.  As an example, I recall a comment I posted on the GigaOm website on debt-laden IPOs.  My comment touted Aruba Networks (prior to its IPO) based on its pedigree of investors Sequoia Capital and Matrix Partners:

Interesting post. Clearly there is a strange dynamic based on the BigBand and Clearwire IPOs. Who says the stock market is rational? Another way to speculate about IPOs is based on investor pedigree. I posted an item to our blog (2/7/07) illustrating the investment networks of BigBand, GluMobile, and Aruba. Of the three, Aruba has the best pedigree with their ties to Sequoia Capital and Matrix Partners (Apple & SanDisk as other co-investments). For those interested:
http://linksviewer.com/blog/?p=40

The comment elicited the following response:

Pedigree? Voodoo science…very irrational way to look at IPO’s or a company’s survability. Think about competition, product portfolio, and profits to get past smoking mirrors.

I found it unnecessary to comment on the above response because Aruba Networks (ARUN) gained 29% on its IPO date (3/26/07) and is currently one of the top IPOs in 2007.  This reply actually reiterated my point - that IPOs are often irrational.  The key point is that they are not necessarily irrelational.  Competition, product portfolio, and profits are presumably figured into the price point as valuation indicators.  But how can you put a price on capital relationships?  Realize that I consider myself an outsider on investing matters, merely pointing those in the know to information and metrics that may not be readily available and thus not factored into IPO initial pricings.  As another example, even after the Infinera IPO, I found no sources that tied Infinera to Juniper Networks.  IPO speculators, I surmise, are hungry for any information that provides them a strategic advantage - and capital networks and IPO network metrics seek to fill this void.  By the way, Infinera was up another 28% closing at $25.16 today (a 94% gain from its IPO price).  For more information behind the Infinera IPO, check out GigaOm’s recent post: From Zepton to Infinera, a start-up story.