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2010-12-21 12:09:07
Some tech start-ups look over-valued
Internet start-ups
Dec 16th 2010 | NEW YORK AND SAN FRANCISCO | from PRINT EDITION
I CAN T decide what I like poking more: you, or these bubbles, says
bubble-blowing Kim Kardashian, a reality-TV star, in a new application for
Facebook (see right). Cameo Stars, the company responsible for this innovation,
lets Facebookers send to their online friends clips of minor celebrities
mouthing generic greetings. Besides enriching the world s culture, the firm may
also make a fortune. But gloomy types wonder if the profusion of highly valued
internet start-ups with lighter-than-air business plans is evidence of a
different kind of bubble.
For the first time since 2000, internet and technology entrepreneurs can raise
seed capital with little more than a half-formed idea and a dozen PowerPoint
slides. There is probably a bubble in the number of start-ups, says Alan
Patricof, a venture capitalist, though he is not yet convinced that there is
irrational exuberance in later-stage valuations.
Yet valuations have certainly risen, especially for the leading firms in this
latest, social phase of the digital revolution. Groupon, a two-year-old firm
that offers group discounts to online consumers, reportedly turned down an
offer potentially worth $6 billion from Google, prompting analysts to ask if
Groupon s founders had lost their coupons. A secondary-market auction of shares
in Facebook in December had a minimum offer-price 77% higher than the price
reportedly paid in a similar transaction three months earlier. Twitter is
valued at $3.7 billion, up nearly fourfold in a year. The number of deals with
(pre-investment) valuations of at least $100m is also increasing, according to
Cooley, a law firm (see chart).
There are differences between today and the dotcom bubble of a decade ago. Then
it was initial public offerings that were overpriced. Today, although the IPO
market is reviving, it remains a shadow of its former self. Instead, the main
way for the owners of a start-up to cash out is to sell their firm to a bigger
one, such as Cisco, Google, Facebook or even Groupon. These tech-savvy firms
ought to be less gullible than the stockmarket investors of 1999. But their
owners may now be so wealthy that they care less about value for money than the
coolness of owning the Next Big Thing.
The emergence of an active secondary market in shares of start-ups yet to go
public has allowed founders and early investors in firms such as Facebook and
Twitter to bank fortunes without waiting for a traditional exit by IPO or
acquisition. These secondary-market prices feed hype about what these firms
might be worth, were they to list on the stockmarket. Not many shares are
available; many punters are chasing them. And those punters tend to be
outsiders, such as fund managers and private-equity firms, who may not
understand the tech business as well as insiders do.
Then there is the growth in angel investing, by rich individuals and small
funds that provide seed capital to start-ups too small to interest a
venture-capital firm. These angels make many small investments (say, $100,000 a
time), in a strategy critics call spray and pray . That could certainly
account for a bubble in start-ups. One prominent angel, Chris Sacca, has
reportedly paused his investing on the ground that valuations have become
overblown.
Other investors say this is alarmist nonsense. For every firm that gets funded
at a higher-than-normal valuation, a hundred are getting financed at a normal
one, says Ron Conway, a well-known super angel who has invested in many
high-profile start-ups. Moreover, many young firms can tap into a thriving
online-advertising market that was but a dream when the dotcom boom turned to
bust.
Today s entrepreneurs also have a deeper understanding of the industries they
are trying to transform, says Nick Beim of Matrix Partners, a venture-capital
firm. Fewer of them are engineers. More are ambitious non-technologists with a
business idea to change industries such as media, advertising, financial
services or fashion. These industries are concentrated in New York, which is
why the new boom is as much in Manhattan s Silicon Alley as in California s
Silicon Valley.
Mr Beim reckons this industry expertise will mean that start-ups in social
commerce , where there is a clear revenue model from the start, are more likely
to succeed than those in social media, where no one knows where the profits
will come from even when millions use the service (eg, Twitter). Three of the
leading social-commerce firms, Groupon, Gilt Groupe (a luxury-goods seller in
which Matrix has invested) and Zynga (a social-gaming firm), are increasing
their revenues faster than any start-ups in history, says Mr Beim. That is why
this time may be different. Of course they say that during every bubble.
from PRINT EDITION | Business
MacAfrican wrote:
Dec 16th 2010 1:05 GMT
Call me cynical, but with the race run in property, corporate and sovereign
debt, what is an investment banker to do for those 2011 bonuses? I know! Let's
see whether we can dust off that trusty old dot-bomb file!
Andover Chick wrote:
Dec 16th 2010 3:06 GMT
Like the previous dotcom boom the social boom is sucking in all sorts of tech
lay people who find it the greatest thing since sliced bread (or the previous
bubble).
In particular, this boom is HUGE with females. Most tech booms are centered on
males, but females are crazy about social applications. I know so many women
who are outright addicted to facebook and twitter. There is no question this
will become a bubble, but it has a few more years to go until popping.
Sensible GaTech Student wrote:
Dec 17th 2010 3:55 GMT
At a time when companies such as Facebook and Twitter are valued in the
billions, though they have practically no cash flow, it doesn't take a genius
to cry, "Bubble!"
Rincewind_wizzard wrote:
Dec 17th 2010 11:17 GMT
There are so many bubbles to pop. The loudest one will be the money bubble,
when people finally realize there is nothing behind these little pieces of
paper.