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No, In Fact, We Haven't Seen This Movie Before

By - January 13, 2011


Thanks to monster private financings from Groupon and Facebook, as well as the promise of major IPOs from Demand, LinkedIn, Zynga and others, the predictable “watch out, here we go again” buzz is rising up in the press. This article from Ad Age, subtitled “With Billion-Dollar Dot-com Valuations Back in a Big Way, It’s Time for Alarm Bells to Start Ringing,” is typical of the bunch. With a “we’ve seen this movie before” tone, it points out that most of the successful companies of today had models that were tried ten years ago, and in the main they failed.

But I’d like to point out a couple pretty obvious differences between the dot com busts of a decade ago, and the companies that are now earning billion dollar valuations. To wit:

– Each of the companies earning these valuations have revenues in the hundreds of millions or more, and operating profits in the tens of millions, if not more. Most also have operating histories of many years, and/or executives and boards who have extensive histories operating in the Internet economy.

– The markets overall have changed dramatically, on many different fronts. First of all, nearly every consumer in the developed world is comfortable spending money using the web. Second, the web is firmly a mobile medium, enabling business models that were mere dreams a decade ago. And third, the markets have been mostly closed to public investment in the “Internet thesis” for most of the past ten years, so there is a very strong pent up demand to invest in what many see as the future of how business will be done.

Combine these factors and you have what I view as a pretty solid environment: a strong demand for quality companies, and quality companies to fulfill that demand. Is $50 billion too high for Facebook, or $5billion too high for Groupon? Well, we’ll see. As the initial surge of IPO demand abates, newly public companies will prove their value in the long term by delivering growth. At least they have strong platforms of revenues and profits, as well as extraordinary market positions, from which to start. Remember, Google went public in 2004 at under $100, and nearly everyone thought the company was overvalued.

Back in the dot com era, most retail Internet investors were buying on the come, on promises that the hand waving and affirmations of Web 1.0 entrepreneurs would magically come true. Almost none of the companies that went public back then could boast the metrics today’s private winners do. Truth be told, the promises of the Internet hand wavers are coming true, but for investors in the 1990s, it’s a decade too late.

We’re in an entirely different place, as an industry, than we were ten years ago. I very much doubt we’ll see the same mistakes made again. If money losing companies with nothing but an idea and some VC backers manage to go public, I’ll be the first to write a post about our collective amnesia.

And this is not to say that marginal companies won’t attempt to go public in coming years, or that there won’t be flameouts and losers over time. There always are. But compared to the late 1990s, the companies lining up to offer themselves to the public look healthy, well positioned, and very, very real.

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11 thoughts on “No, In Fact, We Haven't Seen This Movie Before

  1. Perry says:

    I agree with your line of defense, John. I also think it’s worth counter-balancing this with the additional reality that social engagement and mobility also can support accelerated swing patterns that are orders of magnitude easier to see on scale.

    So, while the position is more fiscally solid and operationally secure, the switching barriers and mechanisms all suggest that the companies can be “overthrown/ratcheted” in alarmingly quick ways.

    In my experience, these risks aren’t understood by traditional market makers (and will probably be ignored), so valuations still have a probability of becoming “over-weighted”.

    One man’s opinion, fwiw.

  2. Ted says:

    Very good points. And sane words.

    While not seeing a bursting bubble, don’t you see similarities between then and now that a couple very successful business (albeit at different revenue scales, but PayPal and Groupon and eBay and LinkedIn are decent analogs) lead to many other long shot deals with high valuations deal valuations and funding that are unrealistic long shots.

    That’s where I see the similarity between funding now and in 1998/99 … a couple giant great companies are leading to funding many other companies are not nearly as strong.

  3. Mark Sigal says:

    Two comments, John. One is that I’ve noticed a collective plea in media and venture circles almost begging conventional wisdom to open up the IPO flood gates — this time it’s different, mobile changes everything, it’s core to the economy and our national psyche, etc.

    It’s like watching and waiting for a pot to boil. Perhaps the more we talk about it, the sooner it will happen, but I’m dubious. The more someone tells you that something’s perfectly safe, the more you worry that maybe it’s not, and at least as a contrarian, it does raise a red flag (for me).

    The other thing is that the truism that too much money chasing too few good deals spoils the party for everyone is a theme that we’ve all learned too well from the last bubble.

    It’s the Buffet-ism axiom of market waves moving from Innovators to Imitators to Idiots. All of that makes people reasonably skeptical that this time, this market is different. In fact, the very utterance of such phrases is usually taken as a bearish indicator.

    Everyone groks that Facebook is one in a million, but they’ve already priced and funded their IPO…PRIVATELY (DST, Goldman)!

    As an investor, LinkedIn, Zynga and Demand Media are all a pretty significant step down qualitatively, and they’re the gold standards in their categories.

    Simply put, private money has gotten ahead of the public markets. One or the other will invariably give. It’s just a question of who blinks first.

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  5. Tom says:

    You make a decent case! And, in fact here I am signing in via Facebook…

    But other arguments are out there I’m sure you know.

    And I used their button for sign-in because it was easy… and I know it has implications for me as an advertising target which I accept… but there’s no particular ‘loyalty’ involved… and I spend little time actually on the site, play no games and have purchased nothing based on ‘friend’ recommendations.

    More than that though

    Certain ‘inventions’ will inevitably arise given the development of the landscape that makes them possible. They are emergent properties of the new landscape.

    The casual peer-to-peer networking offered by Facebook is one such form.

    Like with search before once a certain tipover point is reached concentration becomes self-reinforcing. Alta-vista may have been first in that field… but Google got the prize.

    So it is with Facebook post MySpace. A tipover point may have been reached. But I wouldn’t count on it.

    Its future may be aborted after achieving wide penetration but only marginal utility. There is nothing other than inertia (all my friends are here)… and a few games I understand are popular with some to keep their numbers up.

    Because while Facebook is currently dominant, it doesn’t address the requirements for deep peer-to-peer association.

    It doesn’t understand the roots of the peer-to-peer relationship in proximity and capability… in other words it doesn’t really help people DO anything much with others.

    Facebook and other such sites are trying to bridge a longstanding gap as ICT quickly goes global.

    In evolutionary terms its essentially instantaneous:

    There is a FUNDAMENTAL SCALING ISSUE IN HUMAN SOCIETIES associated with NATURAL HUMAN COMMUNITY SIZE (Dunbar’s Number), THE ALTRUISM PROBLEM* (there’s a problematic discontinuity between biological and intellectual altruism) AND COGNITIVE LIMITS (the attention economy).

    In short… our personal networks are smaller than the social organism of which we are a part.

    I believe the pervasive peer-to-peer network which will achieve dominance will have some particular characteristics…

    And that while there will plenty of opportunity for commercial activity… and especially Groupon’s sort of local focus…

    The Core of this persistant network both for practical and vital evolutionary reason should be Commons-owned with critical commons focussed functionalities.

    This is too long I know… here’s a piece of the pie:

    Political Fundraising: Act Blue, Facebook and the Missing Network Imperative

    Empowering the Commons: The Dedicated Account (Part I)

  6. Stephen says:

    Very true. Most, if not all of the business plans of the nineties dot com bust were based on there being ubiquitous broadband. The 96′ Telco act killed that. Also we had an incredible deflation in the late 90’s (Gold was at something like $250 an ounce) so all those levered up companies had to pay back in more expensive dollars than they burrowed. Cash flow dwindled with the lack of last mile connectivity, and in that perfect storm almost everything crashed.

    Save for the low bandwidth needs of a company called Google. And that launched 2.0 in a more conservative approach. So this is a totally different environment. Broadband is here and more importantly mobile which does an end around the need for hard wires.

    Also the legitimization of the internet is in full swing. More and more TV and print ads are for dubious looking companies and products, while internet ads are getting the legitimate companies.

    People trust big. So the network effect of Google, Facebook, and Twitter, et al. have helped in “legitimizing” as well as enabling the web for the mainstream.

    All looks clear sailing from here, unless bad regulatory and or monetary policies try to throw another monkey wrench into the engine. Which is entirely possible.

  7. Great points. They’re obviously valid (though not bullet-proof) for a slice of web companies with solid operating histories. Let’s assume for a moment that this does end up being a ‘bubble.’ Some of the firms with sustainable business models will be fine and will outlive the bubble (think Amazon), but for every one of these, ten other companies will IPO, shoot to insanely high valuations, and go bust for any number of reasons (you say yourself that there is pent-up demand for internet stocks…don’t think the investment banks aren’t waiting in the wings to capitalize on this and take everyone to the cleaners like they did in the 90s…they’re still sleazebags, probably more so than ever). You make essentially the same point in your final paragraph: just because there are solid businesses out there hoping to go IPO, that doesn’t mean there won’t be a bubble. Investors don’t just gobble up the IPO stock of great companies…they also gobble up the stock of extremely sh**ty companies. This has been true for hundreds of years and I see no reason for it to change now. ‘Collective amnesia,’ as you put it, is very much the rule when it comes to investment patterns.

  8. Tom says:

    P.S. I believe network I describe above has relevance to “Trusted Identity” concept…

    See piece by my friend Nancy Scola and my comment here:

    What’s to Actually Like About “Obama’s Online ID”? CDT’s Aaron Brauer-Rieke Explains…

  9. Tom says:

    Don’t mean to be chain-commenter-type-guy but after previous news received:


    Donation system
    United States Patent 7870067
    Publication Date 1/11/2011

  10. Dylan says:

    Maybe you’re right… Groupon is the most troubling of these for me. Clearly, Facebook has made a significant impact in the daily lives of enough people to justify a high valuation and Zynga is a cash cow (which could just as easily be short-lived after another inovation cycle or two. For now, though, pretty solid).

    Groupon’s valuation, however, seems to me to be built less on a sustainable revenue model and more on the huge stack of money they’ve managed to raise. The revenue model exists (and it’s a good one) but not to the tune of a $6b valuation.

    Facebook, Twitter, Zynga, Groupon – They could all end up being huge for decades. But would it really surprise anyone if most (or all) of them are dead in the next 5 years? I’d be surprised if Facebook didn’t survive, but not THAT surprised. And if that happens, it’d be hard not to call this a bubble.

  11. gets new says:

    In my honest opinion, the legitimization of the internet is in full swing. More and more TV and print ads are for dubious looking companies and products, while internet ads are getting the legitimate companies