We all remember the Internet bubble back in 1999-2000 era. Start-ups were getting huge valuations. The joke then was – if you are 27 years old and not a millionaire, then you are a failure. All you needed was a sign-board saying “new internet company” and stand on Sand Hill Road. Several cars will stop and within hours, you should have a check worth millions as investment.
This is an exaggeration of course. Jeff Bezos of Amazon even said – we spell profit as “prophet”. Then the bubble burst one day and the debris was huge. Hundreds of B2C and B2B companies went belly up.
Now after a decade, we see a bit of a bubble again. The landscape is somewhat different. There is no rush to an IPO, which was the only way to make the founders and investors very rich. Now there is a secondary market that buys stocks off the founders and early employees (and some investors as well). So we see Zynga planning to raise $500m. Groupon raised a huge amount. Kleiner Perkins which missed out on the hottest social networking companies, by focusing on green technology, decided to make up for lost time. Hence they invested $120m in Twitter and also $35m in Facebook at an astronomical valuation of $52B. It sounded like KP just wanted a check mark on its portfolio by investing in Zynga, Twitter, and Facebook. In the latter two, they have no board seat nor significant influence on the management. Everyone seems to come up with another “discount coupon” type company after the success of Groupon. While there is no technological differentiation, it’s an “early-to-market” advantage in building a brand. Zynga, a virtual gaming company, is valued around $10B, while Twitter is rumored to be values at $4B. Google was offering Groupon $6B as a purchase price.
When president Barack Obama visited the Silicon Valley last week, he had dinner with a power group of 12 leaders. Besides the leaders of Cisco, Yahoo, Apple, Oracle, and Genentech, there were the CEO’s of Facebook, Twitter, Netflix, and Google.
For an enterprise software guy like me, it is hard to understand the valuations of social networking and gaming companies. By building a huge clientele, these companies make money on advertising. However, sustainability is another issue. The original Facebook founders and investors are worth obscene amount of money, even before its IPO next year. The only company likely to go for an IPO this year seems to be Linked-In. With huge investment dollars pouring in, these companies do not feel the pressure of seeking an IPO soon. But we may see another mini-bubble building up. So caution is the keyword.