Where angels dare to tread: the new tech bubble

Nice, perceptive piece in the Economist.

SOME time after the dotcom boom turned into a spectacular bust in 2000, bumper stickers began appearing in Silicon Valley imploring: “Please God, just one more bubble.” That wish has now been granted. Compared with the rest of America, Silicon Valley feels like a boomtown. Corporate chefs are in demand again, office rents are soaring and the pay being offered to talented folk in fashionable fields like data science is reaching Hollywood levels. And no wonder, given the prices now being put on web companies.

Facebook and Twitter are not listed, but secondary-market trades value them at some $76 billion (more than Boeing or Ford) and $7.7 billion respectively. This week LinkedIn, a social network for professionals, said it hopes to be valued at up to $3.3 billion in an initial public offering (IPO). The next day Microsoft announced its purchase of Skype, an internet calling and video service, for a frothy-looking $8.5 billion—ten times its sales last year and 400 times its operating income. And those are all big-brand companies with customers around the world. Prices look even more excessive for fledgling firms in the private market (Color, a photo-sharing social network, was recently said to be worth $100m, even though it has an untested service) or for anything involving China. There has been a stampede for shares in Renren, hailed as “China’s Facebook”, and other Chinese web giants listed on American exchanges.

So, are we in another bubble? Answer: yes. It’s different this time, of course. (It always is — which is why people get fooled.) The Economist points out that one new factor is the relative importance of ‘angel’ investors — wealthy individuals who made money out of the last tech bubble — rather than traditional venture capitalists. Another is the arrival of new kind of investors who want to get in on this tech thing. Trouble is: they don’t know the first thing about it.

When it comes to investing in more established companies like Facebook and the bigger web firms, 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.

Yep. So it’ll be nice watching them take a bath.

The Facebook Gold(man) rush, contd.

More from Good Morning Silicon Valley.

Here’s a somewhat clearer look at how much money Facebook is making, according to the Wall Street Journal, which cites a 100-page document given to potential investors by Goldman Sachs: For the first nine months of 2010, the Palo Alto company’s revenue was $1.2 billion, its profit $355 million. And by the way, the same document shows that because it expects to surpass the legal threshold for number of private investors, Facebook will either have to go public or disclose financial information by April 2012, which excites Silicon Valley and others who have been waiting for the lackluster IPO market to make a triumphant return. The New York Times’ DealBook likens the interest surrounding the possible IPOs of Facebook and other social networking companies such as Twitter and Zynga to the dot-com boom of the 1990s.

This corrects a misapprehension of mine. I had thought that if a company went over 499 shareholders, then SEC rules would oblige it to float. But that’s not the case. It either has to float, or publish more detailed financial information.

Facebook: the Gold(man) rush

It’s funny how people never learn. This useful report from Good Morning Silicon Valley brings back memories of the first Internet boom, and of the unscrupulous role that, ahem, major investment banks played in fuelling the lunacy. GMSV notes a WSJ article stating that Facebook’s 2009 profit was $200 million on revenue of $700 million, and goes on:

The New York Times’ DealBook reports today that Goldman Sachs Capital Partners, a $20.3 billion investment fund, was given first dibs at the Facebook investment but declined because of concern that the Palo Alto company’s $50 billion valuation is too high. The report also cited unnamed sources who say Facebook’s 2010 net income was $400 million on revenue of $2 billion. A Bloomberg report compares Facebook to Google: A $50 billion valuation is about 25 times the reported 2010 revenue, while Google’s price-to-sales ratio is estimated at 9. Another Facebook-Google comparison of note comes from Connie Loizos at peHUB: “When Google went public in 2004, it steered clear of sweetheart deal-making. … Deals like that of Facebook-Goldman reek of an old boys club way of doing business.”

Yep. Even if I had any money (which I don’t) and was minded to invest in tech stocks (which would be unethical, given my newspaper column) I wouldn’t ever touch a deal in which Goldman was involved. This, after all, is the bank that was recently fined for screwing its own clients. And now some of those saps are stampeding to get a ludicrously overpriced slice of the Facebook action. In ordinary life, they say that one sucker is born every minute. In the stock market, their birth rate seems to be considerably higher.

Later: It seems that the minimum investment Goldman requires for anyone who want to be involved in its Facebook fund is $2m. For disconsolate souls who don’t have that much money to lose, Silicon Valley Insider has this consoling news:

There’s a fun penny stock called Snap Interactive, whose fortune is tied to Facebook.

The company has the most popular dating app on Facebook and charges a small fee for some users. It’s managed to generate $2.7 million in revenue last quarter up from $1.7 million the quarter before.

That growth has gotten some investors attention, and now the stock price is soaring — its up over 1,000% in the last 30 days. So, if you want to roll the dice, and you want to play a Facebook company on the public markets, here’s your chance.

Er, their chart suggests that you may have missed even that boat.

This looks like a bubble to me, folks, with Goldman Sachs manning the airpump. The strategy seems clear: to stampede Facebook into a flotation by triggering the SEC rules that a company with more than 499 shareholders has to float.

In the interests of balance… I should point out that not everyone agrees with me that Facebook is over-valued at $50 billion.

Facebook: the craze du jour

The $50 billion valuation triggered by Goldman Sachs’s investment in Facebook has created another feeding frenzy. The Guardian has a nice piece by Jemima Kiss which manages to steer clear of most of the hype. Meanwhile, here are two charts which may help to put things in perspective.

The first shows the way valuations of Facebook have fluctuated over time.

The second — more sobering — chart shows revenue per user for different online services.

Geek talent wars

Apparently, Facebook is now paying engineers more than Google. And BusinessInsider reports that it seems to be worrying the search giant.

Google offering $100,000 cash bonuses is so last summer. Now it’s apparently offering seven-figure stock payouts to keep engineers from defecting

Last week it was $3.5 million. This week, All Things D reports that one engineer ended a bidding war by taking a $6 million stock grant.

We’ve seem talent wars like this before. Microsoft was sued back in 1997 for poaching employees from database company Borland. Google returned the favor last decade, causing Steve Ballmer throw a chair across the room. Now, Google is trying its hardest not to end up on the losing end as the cycle repeats itself.

In the past, this kind of thing was usually a symptom of a bubble. Why should it be any different now?

U2 can be in Facebook

From The Register.

Elevation Partners, the private equity firm backed by bad-backed U2 frontman Bono, has stumped up $120m for just over 0.5 per cent of Facebook.

The deal values the dominant social network at $23bn, and takes Elevation Partners' total stake to 1.5 per cent, having invested $90m at a $9bn valuation last year.

Reports earlier this month claimed Facebook's sales were between $700m and $800m last year, so Bono and friends reckon it's worth about 29 times revenue at the moment. Which is a lot.

The widely-held assumption is that Facebook aims to IPO in the next couple of years, when Elevation Partners and the other private interests who have paid its running costs since 2004 will cash in.

Bono's fund could use a hit. It sank hundreds of millions into Palm's attempted revival, which ended in a fire sale to HP this year…

AOL offloads Bebo – for ‘exceptionally uninspiring number’

For anyone seeking perspective on the social-networking business, the news that AOL has sold Bebo for what sounds like a fire-sale price should be required reading.

AOL is set to reap an "exceptionally uninspiring" sum for Bebo, the moribund social networking site for which it paid $850m just two years ago.

The Wall Street Journal says a sale could be announced today, with the likely buyer Criterion Capital Partners LLC of Studio City California. This is an interesting location – a suburb of LA nowhere near Silicon Valley.

The deal was confirmed this afternoon, though no details of the price were revealed.

The buyer apparently specialises in turning around companies with revenues of $3m to $30m, which doesn't say too much for the state of Bebo.

Still, it's AOL that is taking a bath on the deal. The journal, ahead of the official announcement, quoted one source familiar with the negotiations who said AOL's price was "an exceptionally uninspiring number" with almost total "value destruction".

As the say in the small print, the value of investments may go down as well as up.

Don’t drink the Kool-Aid

This morning’s Observer column.

Sadly, there is no cure for megalomania. But venture capitalists ought to start funding the search for a cure, because it’s costing many of them a lot of money, and is likely to cost even more in the future.

Here’s how it works. A smart entrepreneur – a Harvard dropout, say, or some guy who made a lot of money by selling off his last venture to some clueless multinational – starts up a web business which grows like crazy by attracting millions of subscribers who use its services for free. Pretty soon, it's got 400 million of them and everyone is saying: “Wow! 400 million users! That must be good for something.”

Then several things happen. Firstly, the proprietor of the sensation du jour starts drinking the Kool-Aid and contracts the aforementioned megalomania. He begins to fantasise that he could own the whole internet. Secondly, thousands of other entrepreneurs think “Wow! He could own the whole internet. We need to make sure our stuff has hooks into his stuff. Otherwise, we’re toast.” And then the mainstream media, whose insights into this could be written in 96-point Helvetica bold on the back of a postage stamp, are going around saying, “Jeez, this stuff is the real deal. How do we get onside?”

P-day arrives

Stand by for TV news footage of the faithful queueing outside Apple stores in the US. It’ll be like the iPhone all over again. Or will it?.

“The first five million will be sold in a heartbeat,” said Guy Kawasaki, a Silicon Valley entrepreneur who was a marketing executive at Apple in the 1980s. “But let’s see: you can’t make a phone call with it, you can’t take a picture with it, and you have to buy content that before now you were not willing to pay for. That seems tough to me.”

Apple and other technology companies that are introducing a wave of touch-screen tablets face an ambitious challenge. The industry wants to create a market for a new type of device that most people do not really need — or do not yet know they need.

Tablets are intended to allow people to watch video, browse the Web, play video games and read books, magazines and newspapers everywhere they go without the bulky inconveniences of a full-fledged laptop.

The people who have already ordered an iPad or will show up at the Apple store on Saturday “are technophiles — the phrase ‘leading-edge technology’ sends goosebumps all over their skin,” said Eitan Muller, a professor of high-tech marketing at New York University’s Stern School of Business.

But those people make up only 16 percent of the total potential market for the iPad, Professor Muller said. “The main market is made up of pragmatists, and the same phrase sends them into convulsions.”

My hunch is that those people who already have iPod Touch devices will be the hardest to convince. Either way, Apple’s big bet is that the iPad can create an entirely new market niche between smartphone and netbook.

Which brings to mind James Surowiecki’s thoughtful piece in the New Yorker recently about the way the market for devices has evolved. Here’s the nub of his argument:

For Apple, which has enjoyed enormous success in recent years, “build it and they will pay” is business as usual. But it’s not a universal business truth. On the contrary, companies like Ikea, H. & M., and the makers of the Flip video camera are flourishing not by selling products or services that are “far better” than anyone else’s but by selling things that aren’t bad and cost a lot less. These products are much better than the cheap stuff you used to buy at Woolworth, and they tend to be appealingly styled, but, unlike Apple, the companies aren’t trying to build the best mousetrap out there. Instead, they’re engaged in what Wired recently christened the “good-enough revolution.” For them, the key to success isn’t excellence. It’s well-priced adequacy.

These two strategies may look completely different, but they have one crucial thing in common: they don’t target the amorphous blob of consumers who make up the middle of the market. Paradoxically, ignoring these people has turned out to be a great way of getting lots of customers, because, in many businesses, high- and low-end producers are taking more and more of the market. In fashion, both H. & M. and Hermès have prospered during the recession. In the auto industry, luxury-car sales, though initially hurt by the downturn, are reemerging as one of the most profitable segments of the market, even as small cars like the Ford Focus are luring consumers into showrooms. And, in the computer business, the Taiwanese company Acer has become a dominant player by making cheap, reasonably good laptops—the reverse of Apple’s premium-price approach.

While the high and low ends are thriving, the middle of the market is in trouble.

Very perceptive IMHO.