SLENTRE.COM

by Sigmund Leominster
Following the appointment of Mark Kingdon as CEO for Linden Lab® back in April 2008, this magazine speculated that an IPO might not be far away.[1] 18-months on, the IPO has not happened and there have been no comments regarding a possible sell-off over this period of time. However, the prospect of an IPO is still there if you read between the lines.

First, Linden Lab started 2009 by buying the online marketplaces OnRez and XstreetSL.[2] The purchase was made against the background of how Second Life® residents had purchased and sold more than USD $360 million of virtual goods and services in 2008. With the global market for virtual goods in 2008 being estimated as USD $1.5 billion, LL clearly saw an opportunity to be a part of this and also take some control over Second Life’s economy.

Second, later the same month, Linden Lab appointed Brian Michon as Vice President of Core Development and Judy Wade as Vice President of Strategy and Emerging Business.[3] This expansion at the VP level is indicative of either an intent to grow or confidence in current growth. Wade’s role was described as being to, “identify new opportunities to grow the business in key vertical and geographic markets.”

Next, in May 2009, the Lab announced that the use of voice over IP (VoIP) in the Second Life environment had reached over 15 billion hours of use.[4] This was a prelude to the eventual release of the AvaLine – or Dial-an-Avatar – service in August. Although there is still some uncertainty about the actual value of this service as opposed to using any other VoIP service (such as Skype), the message from LL is that there is a capability for Second Life users to communicate within and between worlds – a feature that may encourage more business and academic users to spend more time in-world.

Then, in June, Stratim Capital, another private equity firm, picked up an undisclosed stake in Linden Lab, allegedly in a buy-out of one of the current investors, although who that is and for what amount is still unknown.[5] When asked to confirm the transaction, Stratim managing partner Zach Abrams said, “We bought almost the entire position of an existing shareholder… I don’t think this is a company that anyone will be able to put new money into, because it doesn’t look like it will need to raise another VC round.” The not-needing-more-capital suggests some confidence in Linden Lab’s current financial state.

In September 22nd, 2009, Linden Lab released a slew of figures promoting the successes of the Second Life platform.[6] Key statistics included the following:
•    Second Life Residents have transacted the equivalent of more than one billion US dollars
•    World-wide users have spent more than one billion hours in Second Life
•    User hours grew 33% year-over-year to an all-time high of 126 million in Q2 2009
•    The in-world economy grew 94% year-over-year from Q2 2008 to Q2 2009
•    Almost USD50 million is spent each month in user-to-user transactions
•    Roughly 60% of active Second Life Residents are based outside of the US, representing more than 200 countries, with the Second Life Viewer being available in 10 languages

The Second Life blogosphere community has been critical of the accuracy of these figures but veracity aside, the tone of this press release is undoubtedly one of “talking up” the company, and the two major reasons for doing this are to satisfy shareholders and attract buyers. Linden Labs current shareholders are private equity firms, who, in the medium term, would be focused on turning a profit – which mean selling the company.

In the same week, Linden Lab’s Director of Marketing and PR Manager, Catherine Smith, and CEO Mark Kingdon were in Amsterdam setting up a new marketing office that officially goes live in January 2010.[7] According to Kingdon, “We want to approach the European market from Amsterdam.” There are other reasons to do this. Setting up in Europe can have tax advantages for a US company as royalties on earnings that go through a holding corporation are tax exempt. If you want to bring that into the US, the Treasury then wants a slice, but so long as you use the capital for European investments, it’s a neat way of leveraging European earnings. One other advantage: Potential European investors/buyers may feel much more comfortable with a “local” presence.

In June 2009, Global Silicon Valley Partners, under their Next Up Research brand name, released a report on Linden Lab that provides an analysis of the company’s value as an investment opportunity. The report was not commissioned by the Lab, nor is it an “intention to sell” on behalf of any of the investors, however, it makes interesting reading.

Using a mergers and acquisition transaction analysis, they arrived at a valuation of $658 – $700 million for Linden Labs or an estimated price per share of approximately $12.16 – $12.93. they note that on the upside, Second Life users spend more time in-world than any other online game; that it has been resilient to the current economic downturn; and that the $700 million valuation is a good price. They balance this with some negatives; of the 16 million registered users (which will include alts) only one percent – some 170,000, have premium accounts; 20% of recent growth has been from emerging markets and these are non-paying members; a number of nations are thinking of taxing virtual transactions that are currently untaxed; and grid stability issues make the Second Life experience unsatisfactory.

Given the current state of the market, no-one is really looking to invest significantly in virtual worlds. An IPO now would be unlikely to raise significant amounts of revenue and so it’s therefore unlikely to happen until next year at best. The events outlined above over the past year hint strongly of a move toward positioning Linden Lab for an IPO but the investor market is far too bearish for the bullish needs of high-tech virtual worlds.

Resources
[1] SLentrepreneur Magazine: Mark Kingdon Is New Linden Lab® CEO: http://www.slentre.com/second-life-news-mark-kingdon-is-new-linden-lab%C2%AE-chief-executive-officer/
[2] SLentrepreneur Magazine: Linden Lab Goes Shopping, Buys Virtual Goods Marketplaces: http://www.slentre.com/second-life-news-linden-lab-goes-shopping-buys-virtual-goods-marketplaces-to-integrate-web-shopping-with-second-life
[3] Linden Lab Press Release January 27th, 2009: Linden Lab Expands Leadership team: http://lindenlab.com/pressroom/releases/27_01_09
[4] Linden Lab Press Release May 20th, 2009: Over 15 Billion Minutes Of Voice: http://lindenlab.com/pressroom/releases/19_05_09
[5] PaidContent.org: Stratim Capital Buys Stake In Linden Lab: http://paidcontent.org/article/419-stratim-capital-buys-stake-in-linden-lab/
[6] Linden Lab Press Release 22nd September, 2009: 1 Billion Hours, 1 Billion Dollars Served: http://lindenlab.com/pressroom/releases/22_09_09
[7] DeHoeksteen.Live: Amsterdam Gets European HQ For Linden Lab: http://hoeksteen.wordpress.com/2009/09/27/amsterdam-gets-european-hq-of-linden-lab-second-life
[8] Sharespost: Linden Lab: http://www.sharespost.com/companies/linden-lab