Should You Follow Top Investors by Dumping These IPOs?

I would have thought that this time around things would be different. After the Internet bubble of the late '90s, when Internet companies were more interested in eyeballs than profits, there should have been some lessons learned, right? Venture capitalists, founders, and CEOs should be more focused on building a business this time around rather than building a hot stock and running for the hills once they dump shares on the public... right?

You might have thought so, too, but it seems like very few of the people behind Internet companies are really in it for the long haul today.

Nothing has changed
Investors in Internet companies don't seem to be able to run from their shares fast enough, even after stocks have fallen to levels well below their IPOs. This is highlighted by two of the most famous investors in Silicon Valley today: Peter Thiel and Marc Andreessen.

Peter Thiel, a very early investor and a director at Facebook (Nasdaq: FB  ) , sold 20.1 million shares in the first two days after his lockup ended, nearly 80% of his remaining stake in the company. He couldn't wait to get out despite the fact that as a director he's supposed to have the long-term interests of shareholders at heart. I guess his heart tells him to take the money and run.

Groupon (Nasdaq: GRPN  ) investors have run for the door since its lockup period ended on June 1 and Marc Andreessen is one of the more high-profile sellers, dumping shares as quickly as he could along with hedge fund Maverick Capital and Fidelity, which also sold shares.

Thiel and Andreessen are considered icons in Silicon Valley, and you would think that investors would want to follow their every move. But their companies have largely been disasters for retail investors, especially lately.

Are Silicon Valley geniuses good investing partners?
After a very successful stint at PayPal, which was sold to eBay for $1.5 billion, Thiel moved on to invest in LinkedIn, Facebook, Yelp (NYSE: YELP  ) , and a plethora of other startups.

Andreessen also started with a successful stint at Netscape, which was sold to AOL for a tidy profit to investors. After a stint at AOL he formed LoudCloud and started becoming an angel investor and eventually a venture capitalist. This work resulted in investments in Facebook, Twitter, Groupon, and Zynga (Nasdaq: ZNGA  ) , just to name a few.

These two guys are clearly well-respected and well-connected in Silicon Valley, and one might think that following Thiel and Andreessen into their investments may seem like a wise move. Considering the millions they've made, I don't fault the thesis, but investors who've followed them have been crushed by the public markets. I've provided the performance of the five most high-profile stocks from their closing price the day of their IPO (since many retail investors don't get in at the IPO price).

Company

Investor(s)

Performance Since IPO

LinkedIn Thiel, Andreessen 26.8%
Facebook Thiel, Andreessen (54.4%)
Zynga Andreessen (73%)
Groupon Andreessen (83.8%)
Yelp Thiel (13.7%)

The only winner among the group is LinkedIn, while the others have been complete disasters.

Companies like Zynga, Groupon, and Facebook have collapsed so fast you have to wonder if insiders wanted to dump shares while they were hot. If there's one thing Thiel and Andreessen know how to build, it's a hot company -- but a long-lasting company, not so much.

This doesn't mean that these investors haven't done well for themselves or those who invest in their funds. Andreessen was behind the purchase of Skype from eBay for $2.75 billion. He sold it less than two years later to Microsoft for $8.5 billion. It's just too bad you didn't have the same inside track he did.

One hot-shot building to last
Not all of the big names from Silicon Valley's early days have built companies that have failed on the public markets. Elon Musk has managed to become a CEO who intends to build a lasting business, unlike so many of his PayPal Mafia brethren. Musk's Tesla Motors (Nasdaq: TSLA  ) is an up-and-coming electric vehicle manufacturer that is hoping to compete with Detroit and Japan on a large scale. The company has yet to become profitable, but the Model S is selling well and the Model X took in $40 million pre-orders on its first day, well before production. The company's stock is up 53.2% on a comparable basis to the returns I provided above.

Musk also founded Space X, a space exploration company that now has a $1.6 billion contract with the U.S. government and was the first private company to launch a spacecraft to the International Space Station. Who knows if the company will ever bring a human settlement to Mars, as Musk hopes, but he is certainly in for the long haul.

He is also the largest shareholder in SolarCity, the largest provider of solar power in the United States. SolarCity is hoping to go public in the near future, and while Musk has never been involved in the day-to-day, he's taken a long-term view on his investment in the company.

Built to last isn't their motto
Two decades ago, fortunes were built by building a business. That's what Bill Gates did at Microsoft, what Steve Jobs did at Apple, and even what Larry Page and Sergey Brin did at Google when it was founded 14 years ago -- they built businesses, not just hot stocks. They were in for the long haul and investors profited wildly from their visions and the execution of their plans.

The people and funding that backed IPOs like Facebook, Groupon, and Zynga don't appear to have the same goal of building a lasting franchise, as evidenced by their quick exits from the stocks. They built hype around a company and took it public, leaving it to us to deal with after that. Maybe that's the biggest lesson we can take from the disappointing dot-com IPOs of the last two years: Some companies have investors and founders who are built to last and some will run from their investments as soon as they can. Thiel and Andreessen seem to be more of the latter than I would have hoped.

Facebook may be the one company that could stand the test of time, but only because Mark Zuckerberg is in it for the long haul. Find out when Facebook will be worth buying in our detailed report on the stock. It comes with a year of updates and can only be found here.

Fool contributor Travis Hoium manages an account that owns shares of Apple and Microsoft. You can follow Travis on Twitter at @FlushDrawFool, check out his personal stock holdings or follow his CAPS picks at TMFFlushDraw.

The Motley Fool owns shares of Linkedin, Tesla Motors, Google, Facebook, Microsoft, and Apple. Motley Fool newsletter services have recommended buying shares of Linkedin, Microsoft, Apple, eBay, Tesla Motors, Google, and Facebook. Motley Fool newsletter services have recommended creating a bull call spread position in Apple and creating a synthetic covered call position in Microsoft. The Motley Fool has a disclosure policy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.


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