Haven’t we been down this road before? Technology companies with no real business model—and no profits—get large sums of money thrown at them by venture capitalists. They build out their no-profit websites and applications, and go public. Their IPOs are the darlings of Wall Street (for the most part), but then they have to file that first quarterly report, and it becomes clear they cannot sustain that pumped-up, billion-dollar valuation simply because it’s the next greatest thing. As a result, stock prices crash, the market lurches, and the economy takes a hit that takes years to recover from.
Haven’t we learned from the late 1990s? Back then, all you had to say is you’d build a company around Web-based software—that you were a “dot-com”—and the money flowed like wine. Remember companies like Pets.com, which sold pet supplies over the Internet? Or Webvan.com, an online grocer? Both bankrupt. Or Broadcast.com, Mark Cuban’s startup that was purchased by Yahoo for almost US$6 billion, and is now defunct? How about Freeinternet.com, which had 3.2 million users in 1999 (the fifth-largest Internet service provider in the United States at the time) but lost $19 million that year on revues of less than $1 million, leading to the cancellation of its IPO?
No doubt, some companies emerged stronger after the bubble burst, and are in fact among the most highly valued companies in the world, with Amazon and Google leading the way. Then there’s America Online (now Aol), which was such a darling in 2000 that it merged with Time Warner to create a media giant. But the rise of non-subscription e-mail and better search engines forced the company to drop AOL from the name. It has since become its own media company, acquired the Huffington Post and increased advertising, giving it a market capitalization of $3.55 billion.
Fast-forward to today. All you have to do is build a company around social media, and the money again flows. Facebook went IPO, and its stock sank. It has since purchased Instagram for about a billion in cash. It’s building a user base—following the Google model—that it can deliver ads to.
Twitter went IPO, and its stock is trading well above its opening price. But it is valued at more than 50 times its sales right now, unheard of since… the LAST bubble! And yet, Facebook and Twitter are considered the drivers of the social media market, along with LinkedIn, which has a market capitalization of $25.6 billion that is more than 134 TIMES its 2013 expected earnings! How is that sustainable?
Meanwhile, Zynga, the game company, and Groupon, the deal company, went IPO, and these once-hot technology companies have floundered since then. Zynga, whose stock price crashed six months after its IPO, is trying to find its footing with a new CEO and management. Groupon began trading at a bit above $30 a share in mid-2011, and is now at about $9 per share, while its market capitalization sits at $6.5 billion. And Microsoft, which paid billions for Yammer, only this month made it available to Office 365 Enterprise users as part of their license. We’ll see if that acts as a driver to move people off their on-premise productivity applications and into Microsoft’s cloud.
Then there are social companies such as Box, Jive Software and Basecamp, among others, wooing investors with their not-so-unique brand of social magic with some sleight of hand when it comes to numbers.
But before we rush to throw money at those companies, let’s take it slow and see if there are revenues and a solid plan to support these huge valuations.
Otherwise, well, we’ve seen it all before, and would prefer not to have to live through it again.