Bubble 2.0 in the making?

May 19, 2011 | By More

Are we in the middle of Bubble 2.0?

The front page of the Economist (May 14th 2011) warned of a new tech bubble. It got my interest.

The case for another bubble in the making is compelling.

Microsoft has recently announced its purchase of Skype for ten times its 2010 sales and 400 times its operating income – valuing the company at $8.5 billion. When eBay sold Skype in Sept 2009, the company was only valued at $2.7 billion. Can a company increase its value by over 3 times in a mere 15 months?

Facebook valuation keeps going up

Facebook was recently valued at $76 billion, which is more than Boeing or Ford. Privately traded shares of Twitter values the company at $7.7 billion with revenues of around $50 million. Even LinkedIn, a social network for professionals is being valued at up to $3.3 billion in a forthcoming initial public offering (IPO).

Chinese web companies are also getting into the act. There has been a stampede in Renren (hailed as “China’s Facebook”) when it listed in NewYork’s Stock Exchange. On the first day of trading, Renren was worth nearly 100 times its 2010 revenues, almost 3 times that of Facebook!

Renrens IPO in May 2011 raised $855 million

Is history about to repeat itself? Those who think not point out that the tech landscape has changed dramatically since the late 1990s.

Firstly, the internet is now more mature: today there are 2 billion internet users, many of them in huge new wired markets such as China. A dozen years ago ultra-fast broadband connections were rare; today they are ubiquitous. And last time many start-ups had massive ambitions but miniscule revenues (remember Webvan and Pets.com); today’s web stars such as Groupon, which offers its users online coupons, and Zynga, a social-gaming company, have phenomenal sales and already make respectable profits.

Last time, the bubble expanded only after numerous web firms were floated on stockmarkets and naive investors pumped up the price of their shares to insane levels. This time, so far, there are relatively few big internet IPOs, although this may change.

According to the Economist, this time it is different, but for different reasons. The tech bubble-in-the-making is forming largely out of sight in private markets and has a global dimension that its predecessor lacked.

This boom also has wider horizons than the previous one. It was arguably started by Russian investors. Skype was born in Estonia. Finland’s Rovio, which makes the popular Angry Birds smartphone game, recently raised $42m.

100 million downloads and counting for this mobile phone app!

And then there’s China. Renren and Youku, “China’s YouTube”, supposedly offer investors a chance to profit both from the country’s extraordinary growth and from the broader impact of the internet on commerce and society. Chinese web start-ups often command $15m-20m valuations in early financing rounds, far more than their peers in America.

All this is being pumped partly by wealthy “angel” investors, some of whom made their fortunes in the late-1990s IPO boom. Their financial firepower has increased and they are battling one another for stakes in web start-ups.

Traditional venture capitalists now face competition from private-equity companies and bank-led funds hunting for profits in a bleak investment environment. Gucci-shod leveraged-buy-out kings may appear to be more sophisticated than the waitresses buying dotcom shares a decade ago—but many of the newcomers are no more knowledgeable about technology.

This makes the bubble forming in the private market to be pretty big by the time it floats into the public one.

Although well established outfits like Facebook and LinkedIn may have fairly solid revenue plans, other less robust wannabes are likely also have their prices dangerously inflated by the angels’ antics. And it may be China that causes the web bubble eventually to burst, speculates the Economist.

Irrational exuberance rarely gives way to rational scepticism quickly. So some bets on start-ups now will pay off. But investors should take a great deal of care when it comes to picking firms to back: they cannot just rely on somebody else paying even more later.

With luck the latest web bubble will do less damage than its predecessor.

Acknowledgements to The Economist.

For more information, read the article here.

 

Related Posts Plugin for WordPress, Blogger...

Tags: , , , , , , , ,

Category: Viewpoints

Error: Unable to create directory uploads/2017/06. Is its parent directory writable by the server?

About the Author ()

EngTong, pioneer and innovator. Graduated from Imperial College London with an MBA from Cranfield School of Management. Lived in Scotland, England, California, Beijing and led teams in Italy, France, Japan, Taiwan and Malaysia to do the impossible. Now based in Singapore and believes the future is to blend the sophistication of western management practices with the strength of Asian Values. Trained as a Chartered Engineer. Member of IET, Associate of City and Guilds and a certified SixSigma Champion.

Comments are closed.