Dot Com Bubble 2.0…?
When I read the news that Groupon had turned down a $6 billion offer from Google to purchase it – I was a little bit surprised. When I heard that the valuation of Twitter has been placed in the region of $8 to $10 billion I was even more surprised. These companies have been in existence for a relatively short amount of time, and have, certainly in the case of Twitter, far from stellar revenues. Are we witnessing the Dot Com Bubble 2.0?
Facebook – the gold standard of social media. With approaching a sixth of the world’s population busy updating their statuses, sharing photos, linking to videos, and commenting on all of the aforementioned that their friends and families are doing – it is a true powerhouse in terms of web penetration and traffic volumes, only surpassed by Google and its video behemoth YouTube. Facebook has, according the Wall Street Journal estimates, 2010 revenues in the region of $1.2 billion – which is not too shabby by any stretch of the imagination. The Register places the valuation of Facebook in the region of $60 billion – which is a lot more than $1.2 billion for sure! I am a big fan of the TV show The Dragon’s Den – and it is one of the few programs I will actually be bothered to watch. There are countless cases of inventors or entrepreneurs coming on that show and requesting large amounts of money from The Dragons for a return for equity in their company. Once they have made their pitch – invariably the first question out of the dragon’s mouths is ‘what is your revenue…?’ – to which the entrepreneurs will provide an answer. In most cases, there is a great discrepancy between the revenues and the entrepreneur’s evaluation of the company – such as ‘I want $100,000 for 10% of my company and my revenue last year was $1,000.’ In most cases – entrepreneurs with these kinds of valuations leave empty handed. In the case of Facebook – they are almost certainly going to have an IPO at some point during this year or next (most likely next, I would guess). With founder Mark Zuckerberg’s elevation to Man of the Year for 2010 by Time Magazine – and the obsession with Facebook by ordinary citizens, corporate executives, and marketing gurus it is not surprising that they are considered worth $60 billion. Whether Facebook is actually worth $60 billion time will tell – who would have imagined in 2001 that Google would be worth in excess of $150 billion today? Google had revenues last year of about $29 billion – which is pretty good going considering they are basically just selling advertising. As a ratio – they make $1 for every $5 they are valued at as an entirety. Compared to Facebook – which makes $1 for every $50 they are valuated at. For Groupon the numbers are better – Groupon has been valued in the region of $15 billion, and has reported 2010 revenues in the region of $800 million, putting them at a ratio of $1 in revenue for every $18.75 in valuation. Things are not so rosy for Twitter – they have reported 2010 revenues of about $45 million compared to their valuation of approaching $10 billion – for every $1 in revenues Twitter has they are valued at $222, which is not so good.
These evaluation scenarios remind me of The Dragon’s Den – but in reverse. There is a literal line up venture capitalist, hedge fund managers, investment bankers, and wealthy individuals wanting to invest in companies like Facebook, Twitter, and Groupon – even with there almost non-existent revenues in comparison to valuation. If an entrepreneur were to arrive at the set of The Dragon’s Den with the revenue to valuation model of the sites noted above (with the exception of Google) then they would be leaving empty handed – and scolded!
But I can hear you saying ‘it is the potential that has the value – look beyond the present and look to the future!’ So very true – Twitter has about 200 million users at present – and if they could create a model where those users could be monetized then money will rain down from the sky, and marketers and advertising executives would be in the internet equivalent of Shangri La. That, however, is a big if – just ask Rupert Murdoch how well MySpace is doing today! Murdoch famously purchased the original social network back in June 2005 for $580 million – and today it is most likely (definitely) worth much less than a scant 6-years ago (Murdoch doesn’t have much luck with the internet). A while ago there was talk of Murdoch perhaps purchasing Twitter for close to $1 billion – but that is no longer going to happen. An offer of $1 billion for Twitter wouldn’t even get you a tepid cup of coffee, a stale Danish pastry, and some fake smiles in their boardroom these days!
So – what does all this mean…? Well – at various points during the messy and wild-west like history of the internet, numerous companies have been valuated, purchased, and then sunk like a lead filled suitcase in to the sea of obscurity. Remember Infoseek? Disney bought Infoseek for $1 billion and now it is worthless. Excite — bought by @Home for $8 billion and now worthless. And the mother of internet Dodos – Lycos bought by Terra for $13 billion, and now, you’ve guessed it, utterly worthless. The Lycos deal makes Rupert Murdoch’s purchase of MySpace look like a great deal – as he can only lose $580 million on MySpace! Of course, along the way there have been some amazing deals – like Google’s purchase of YouTube in 2006 for $1.65 billion. YouTube has made a fortune for Google – and has, in the process, been ‘fucking with the magic‘ of the TV advertising model.
I cannot help thinking that the fascination and valuations that are current regarding sites like Groupon, Facebook, and Twitter benefit the founders and the early employees (who have equity) the most — and do not necessarily make good business sense. Of course, when it comes to IPO time the investors will scoop up all the stock – and the companies will float on the stock exchange and then they will either sink, swim, or take off like a rocket.