Has the individual investor learned a lesson?

There have been a number of IPO fillings recently, but the one that intrigues me most is the filing by Lindows. As many of you have read, Lindows/Linspire just filed an S-1 to raise $57 million in an IPO. WR Hambrecht is the lead underwriter and will utilize its dutch auction methodology to raise money from individual investors. In my mind, what happens with Lindows will be a barometer of the psyche of the individual investor. It well tell us whether or not the individual investor learned a lesson from the bubble. It will tell us whether or not speculation will run rampant again. As you know, I do find Linux on the desktop intriguing. That does not mean that I believe this is the year and that you should go public now on $2.1 million of revenue in 2003 with a net loss of $4.1 million. On top of that, of the $57 million they are raising, $10 million is going to pay off Michael Robertson, the CEO, for a line of credit he extended the company over the past couple of years. As per the filing,

The approximately $10,400,000 of net proceeds that we intend to use to repay outstanding debt obligations will be paid to Michael L. Robertson, our founder, Chairman and Chief Executive Officer, as payment in full of all remaining outstanding amounts under a revolving line of credit. Mr. Robertson has advanced us funds under the line of credit since July 2002, including advances of $5,600,000 during 2004. Amounts borrowed under this loan are used for our operating expenses. The loan bears interest at the rate of 10% simple interest per year and matures on June 30, 2005.

So not only is this a speculative offering, but also one where the largest shareholder gets paid back $10 million off the top. Michael did pay $4.5 million for the shares that he currently owns but 2/3 of his total capital will be off the table. So how much skin in the game will Michael really have to make this company work? Does this sound like a good investment to you? I am not opposed to the dutch auction and do believe that the methodology has a place in some deals. My big fear is that if this deal does happen, it will only confirm my belief that the individual investor never learned a lesson from the bubble. For the individual investor to forget so quickly about all of the pain and suffering we just went through really scares me.

Published by Ed Sim

founder boldstart ventures, over 20 years experience seeding and leading first rounds in enterprise startups, @boldstartvc, googlization of IT, SaaS 3.0, security, smart data; cherish family time + enjoy lacrosse + hockey

4 comments on “Has the individual investor learned a lesson?”

  1. I want a deal where I get to put $10m back in my pocket. Especially where I loaned the company money to pay my salary. That isn’t to say that Robertson’s time isn’t worth some amount of money, but a I’m not sure it is worth what he says it is.

    Ed, I think you are often to common sense when looking at investor trends. Stocks used to be about the numbers today a good portion of a stock price is popularity and Brandwidth. Linspire would have a massive price per share if it still had Lindows as a name. All my techno-inept rich golf buddies would be like it is Linux but it is also Windows, what could be better. And I’d be like it sux and doesn’t work, and they’d be off in lala land thinking that it some how didn’t suck.

    Stocks are like presidential elections. The winners aren’t usually the best candidates, just the most popular.

  2. Looking at the ridiculous hype that Google’s IPO is bringing to SiliValley, i’ve got to say, the individual investor hasn’t learned a thing. Sure, some people will make a lot of money off of the first few hours that they hold Lindows’ stock. None of those will be individual investors.

  3. Hopefully people will use “real” methods of measuring the worth of any IPO this time around… Read “DOT.CON” by John Cassidy and you’ll really get a feel as to how out of hand the bubble really got…

  4. The S1

    Bottom of page 35, may not be a going concern:
    As of December 31, 2003, we had a working capital deficit of approximately $1,777,000, long-term debt of approximately $4,703,000 and an accumulated deficit of approximately $11,859,000. As a result, we have received an audit report from our independent auditors containing an explanatory paragraph stating that our historical losses and negative cash flows from operations raise substantial doubt about our ability to continue as a going concern.

    Page 36 and 37, Legal concerns:
    Legal Uncertainties

    Microsoft Corporation has initiated lawsuits against us in the U.S. and in several foreign countries alleging, among other things, that our Lindows name infringes various Microsoft WINDOWS trademarks. These lawsuits have forced us to adopt an alternative name strategy for our commerce website and our products and services, pending resolution of the litigation, which has resulted in additional expense and may result in a loss of goodwill associated with our brand name, customer confusion and a loss of sales. We also may be liable for substantial fines, attorneys’ fees and costs and other monetary damages, which may exceed any amount we are able to pay.

    We are also in litigation with our insurance carrier relating to the Microsoft litigation. With respect to the Microsoft lawsuit in the U.S., we obtained a decision from the court that our carrier is obligated to defend us and that it breached its contract with us by refusing to defend. That decision may be appealed, but the only remaining issues to be decided by the court currently hearing the case are issues related to damages for the carrier’s breach of contract, our bad faith claim against the carrier for its failure to defend and the carrier’s obligation to pay any liability that we may have to Microsoft. With respect to the foreign litigation brought by Microsoft, we recently brought suit against the same insurance carrier to enforce its obligations to us regarding the foreign litigation.

    If our carrier successfully appeals the decision relating to its obligation to bear the cost of our legal defense with respect to Microsoft’s U.S. litigation, we may be forced to reimburse our carrier for some or all of the legal fees and costs it has paid to us, and continues to pay to us, in the Microsoft U.S. litigation. Additionally, although we believe our carrier is contractually bound to indemnify us for damages or other amounts we may be forced to pay Microsoft as a result of the U.S. litigation, up to the applicable policy limits, the court has not ruled on this point.

    If we are unsuccessful in our lawsuit relating to the foreign litigation, we also may be forced to reimburse our carrier for some or all legal fees and costs it has advanced to us, and continues to advance to us, relating to the foreign litigation, and our carrier might have no obligation to reimburse us for any amounts we may be forced to pay Microsoft as a result of the foreign litigation.

    Additionally, we have initiated a lawsuit against Xandros, Inc., Linux Global Partners, Inc., Michael Bego, and William Jay Roseman alleging these parties fraudulently induced us to loan Xandros, Inc. $750,000 in exchange for convertible promissory notes, and that Xandros, Inc. then failed to repay the promissory notes when they became due. We are seeking $750,000, plus interest, attorneys’ fees and punitive damages. This lawsuit is in the discovery phase, and may proceed for an extended period of time. We intend to pursue the lawsuit vigorously, but cannot assure you that it will be resolved in our favor. Additionally, even if the court rules in our favor, we cannot assure you that we will be able to collect the amounts owed. We fully reserved this note payable in 2003.

    Although we believe in the merits of our claims and defenses in each of these lawsuits, we may not prevail. Each of these lawsuits has resulted in significant expenses and has been, and is expected to continue to be, a diversion of management’s time and other resources well into the future. Please see “Business — Legal Proceedings” for more description of our litigation.

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