Twenty-Eight Dollars at Open, Fifty-Eight at Close

Netscape Communications Corporation filed its S-1 with the Securities and Exchange Commission in the summer of 1995. The company was sixteen months old. It had revenue — $16.6 million in the first half of 1995 — but it had never posted a profit, and the S-1 said so plainly. The browser that most of America was using to reach the World Wide Web was, at that moment, largely given away for free. The business model was navigator licenses sold to corporate clients and server software sold to businesses building websites. Neither line had yet produced earnings.

Morgan Stanley led the underwriting alongside Hambrecht & Quist. The original filing proposed a price of $14 a share. Within weeks, demand from institutional investors pushed that number to $28 — double the initial figure — before the book even closed. The company's co-founder Jim Clark and its chief executive James Barksdale rang no bell on 9 August 1995; the opening trade on the Nasdaq told the story instead.

The shares were priced at $28 the night before. When trading opened on the morning of 9 August, Netscape's stock opened at $71 before pulling back through the session. By the close of ordinary trading the price had settled at $58.25, more than doubling the offering price in a single day. The intraday high reached $74.75. On no prior hour of its existence had Netscape Communications been worth anywhere near the $2.9 billion its closing market capitalisation implied.

The underwriters exercised their standard overallotment option — the greenshoe provision allowing them to sell additional shares if demand exceeded the original allocation. It was exercised in full. The float was small relative to total shares outstanding, which amplified the price movement: relatively few shares chased by institutional and retail buyers in a market that had been told, repeatedly, that the internet was a new kind of thing.

Marc Andreessen, then twenty-four and listed in press coverage as the company's co-founder, had written the original Mosaic browser at the University of Illinois before Jim Clark recruited him to California. Months later, Andreessen appeared on the cover of Time magazine in bare feet. The image came to symbolise the IPO's aftermath. The editorial and the market event arrived together.

The Netscape IPO did several things to the market simultaneously. It demonstrated that a company without earnings — without a credible near-term path to earnings — could command a billion-dollar public valuation if its product had sufficient penetration and its narrative sufficient momentum. It showed that institutional investors would pay a large premium above an already-elevated offering price, and that retail demand would follow. It suggested, to every venture-backed technology company watching from Sand Hill Road to Wall Street, that the window was open.

The Nasdaq Composite, which peaked at 5,048.62 on 10 March 2000 and then lost roughly 78 percent of its value, was in part a monument to what 9 August 1995 had licensed. The companies that followed Netscape through the public markets in the years between 1995 and 2000 were not uniformly weaker businesses — some were sound — but the pricing convention that Netscape established, in which unprofitability was reframed as investment-phase discipline rather than failure, became the standard against which dot-com casualties like Pets.com and Webvan were eventually measured.

Netscape itself was acquired by AOL in an all-stock deal announced in November 1998 and valued at approximately $4.2 billion at the time of announcement;it closed in March 1999. The browser continued to lose market share to Microsoft Internet Explorer through the late 1990s, a competitive pressure that had been visible in outline even at the time of the IPO. The S-1 had named Microsoft as a risk factor. The market priced the shares at fifty-eight dollars anyway.