In other words, the business is fine. The management team just looks like a bunch of clowns now. I’m assuming the VCs are annoyed and so are Rosetta Stone’s bankers. William Blair & Co. publicly lashed out about the incident to a Wall Street Journal reporter, saying it reflected poorly on Rosetta Stone and the bank that was going to lead the follow-on round.
This is bad news for more than just Rosetta Stone. It’s possible the deal sours the budding resurgence in sub-$500 million market cap companies too. As we wrote about last week, a small initial float of shares can help a new IPO’s stock hold up well, but it also means VCs and insiders can’t easily sell without crashing the stock.
In the case of Rosetta Stone the float was about 11 million shares, with insiders and investors holding the balance of the roughly 20 million shares outstanding. Liquidity was already going to be tough given a thin average trading volume of 328,000 or so per day. Thanks to this snafu, Norwest Equity Partners and ABS Ventures won’t be getting any liquidity from the company anytime soon. And with how few analysts follow small-cap public companies these days, investors may walk away from Rosetta Stone and never remember to return.
It’s a shame. I’m a huge fan of Rosetta Stone’s products, as I’m currently using them to learn Mandarin and Portuguese. The software has an impressive user interface that makes the drudgery of learning a new language actually feel more like playing a game. I can actually lose myself for hours on Rosetta Stone, invariably leading to an angry email from Arrington asking where some post is. When you find yourself suddenly speaking and understanding a new language, it’s that special kind of high-tech magic.
Over the last few months, I’ve been testing out the hosted version of Rosetta Stone, which had some annoying microphone glitches a few months ago, but has worked brilliantly since I downloaded a newer version. Perhaps the management team needs its own upgrade.
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