“This time it’s different”.
It’s always different. When Cisco hit US$80 a share in 2000, making it the most valuable company in the world (worth US$555bn), it was different. It was also different when Goldman traded at US$235 in 2007 (and when AIG hit over US$2000 in 2000 and around US$1500 just four years ago).
Perhaps in the original bubble, Dutch Tulip mania in 1637, it wasn’t different.
With the latest flurry of tech IPOs on Wall Street: LinkedIn, Pandora Media and Zillow (with Groupon, Zynga, LivingSocial polishing their prospectuses), it’s different too. At least that’s what we keep hearing.
“This time there’s revenue too”.
Well, except arguably in the case of Groupon, who’s original S-1 filing — a form containing a company’s financial data — ahead of its impending IPO read like an invitation to invest in one of those too-good-to-be-true schemes which later turn out to be a Ponzi Scheme. Groupon has since toned down the S-1, eliminating lines such as “wildly profitable” and put far less emphasis on the dodgy accounting.
Yes there is revenue this time. Real estate giant Zillow had revenue of US$30 million last year. On the day of its IPO, it commanded a valuation of around US$1.6 billion. By the close of trading on the on the same day, it’s valuation had dropped to US$900 million. A loss of US$700 million. Really!?
At one point a week ago, Pandora, LinkedIn and Zillow translated into US$13 billion in market capitalisation. In their most recent financial years, these three companies have racked up a combined US$17 million in losses. This time it’s different.
LinkedIn, which already spiked to US$122, is again trading over US$100 a share, with a market cap of close to US$10 billion. This, after an IPO price of US$45. The investment banks made money all right.
The problem is they could’ve made more.
Ever since LinkedIn’s “mispricing”, there’s been utter paranoia by the banks that “valuations are out-of-whack with earnings potential”. Get ready for more tenuous and stretched valuations.
Pandora spiked as high as US$26 a share. At around US$18, it still commands a value of US$3 billion. Zillow’s share price jump to US$60 has been tempered with a “more realistic” range of US$32 to US$35.
It’s easy to raise money. In fact, if you’re not raising money right now, you’re not doing it right. Bill Nguyen is held up as the poster-boy of excess after raising US$41 million for Color… an app. It’s not just an app. Nguyen’s not a stupid guy. He sold Lala to Apple for US$80 million two years ago. The technology behind Color is serious. It’s not as simple as an app, even though right now it is. Google was reportedly willing to pony up US$200 million to buy Nguyen’s startup.
Then there’s the Flip video guy — Jonathan Kaplan — fresh from an “exit” at Cisco who has convinced respected VCs Sequoia Capital to fund a grilled cheese chain, complete with an app. Yes, grilled cheese. There’s an app for that.
A prescient tweet by Josh Elman, previously involved with product direction at Facebook and Twitter, says it all:
It all boils down to too much money. All with no purpose. Markets are soaring. Equities offer “little value”. Bonds are risky. Cash won’t get you yield.
Venture capitalists are paranoid about missing the next Google, the next YouTube, the next Facebook… This means entreprenuers are raising funding earlier, at more aggressive valuations, and we’re seeing round after round of financing. DST anyone?
This time its different.
Twitter has a rumoured value of over US$10 billion. Facebook’s is soaring to close to the US$100 billion mark. Imagine what YouTube would be worth today. Possibly a little more than US$1.65 billion.
At least this time round, a few people are admitting it’s a bubble.
The Facebook IPO might just signal the end of the party. That’s if the house of cards doesn’t come crashing down before then.