Posted on December 19, 2007
Filed Under Web 2.0 Kool Aid |
Former Fox Interactive Media president Ross Levinsohn made an interesting statement following his investment firm’s merger with ComVentures to form Velocity Interactive Group. :
Shopping: When I asked if they’re running into companies eager to sell now in case things turn sour, Levinsohn said it was just the opposite. “I’m actually amazed by it. A year ago … there was more desperation to sell.” The Facebook platform initiative and, to some extent, OpenSocial, turned that around, adding distribution to companies that once were only features.” They now have tens of millions of users and are raising money at huge multiples—hundreds of millions of dollars—and they’ll get it.”
Although Levinsohn’s statement only reflects the perspective of one person (albeit an extremely well-connected one), if the reality is indeed that many Internet startups were more eager to sell last year and now think that they’re worth hundreds of millions of dollars instead, there can be no doubt that Bubble 2.0 exists and is getting more inflated.
Psychology is always a great indicator for determining the type of market we’re in. In the public equities market, in a healthy bull market, investors are confident but there’s still enough anxiety to cause periodic sell-offs that keep the market from becoming too inflated. In bubbles, however, overconfidence and greed dominate; not enough air is taken out of the balloon on a regular basis and eventually it pops.
Today’s private equity market for Internet startups, particularly in the consumer space, has looked like Bubble 2.0 to me for some time now, but Levinsohn’s comment is revealing because it specifically reveals that the psychology in the Internet startup space has the characteristics of a bubble market - overconfidence, greed and little anxiety.
There is little valid justification for this. While it’s true that many Internet startups have gained significant userbases in the past year, rumored revenues at most of these startups don’t demonstrate effective monetization of those userbases. In fact, they demonstrate quite the opposite. It’s also worth noting that many of the startups with significant revenues, such as Facebook, reportedly generate most of their revenues from advertising deals that guarantee payment regardless of whether or not they deliver results for advertisers.
And of course, the idea that the Facebook platform and OpenSocial are “adding distribution to companies that once were only features” is completely inane. Just what exactly is the Facebook platform distributing? Third-party features like KissMe, Send Hotness, Get Wasted, Pickup Truck, MatchMaker, Cooties and Wall of Shame! If that represents a meaningful distribution business then I’m on the wrong planet.
Finally, for startups that are “raising money at huge multiples—hundreds of millions of dollars” and aren’t going to have a problem getting it, it might be worthwhile to look at Digg as an example of what happens when your valuation doesn’t reflect what somebody with cash will realistically pay for it.Print This Post