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Zynga raised money in multiple rounds at ever-rising valuations, allowing insiders and other backers to sell along the way.

Facebook's initial public offering will grab headlines in 2012. But as Zynga 's tepid debut shows, multiple private investment rounds and the ability to trade shares before going public means slim pickings when public market investors finally get their chance to own a slice of Silicon Valley's emerging heavyweights. That's one reason the average IPO this year has wound up trading some 10 per cent below its offer price.

Companies such as Zynga and Facebook increasingly avail themselves of so-called "D round" deals. These are very late-stage investments in which companies, in addition to possibly selling some new stock to fund growth, also allow existing shareholders to cash out. At the same time, emerging private exchanges such as SecondMarket allow qualified investors to buy stock from insiders in private firms without conducting an IPO.

Consider Zynga. The online gaming company raised money in multiple rounds at ever-rising valuations, allowing insiders, including CEO Mark Pincus, and other backers to sell along the way. While it was valued about $4-billion (U.S.) in early 2010, its worth on grey markets had tripled by early 2011. More recent signs of slowing growth meant the company fetched just a $9-billion market value when it finally went public.

What's odd is that private market values have historically come at discounts to public prices, generally a reflection of less liquidity and disclosure. Yet for select firms, such as Facebook or Zynga, this no longer seems to apply. Lots of investors want in to a few hot companies – about 80 per cent of trading on gray markets is in five firms – and are willing to pay up, even if there is little financial information available.

For the companies involved, a private market in which they fetch robust valuations may be great. But it's not clear how this benefits capital markets more broadly, particularly if it means by the time companies go public their fastest growth is behind them and their valuations are already full. Zynga shares fell below their offering price on their first day of trading Friday. Taken as a whole, this trend is sucking the life out of the IPO market.