Monday, May 16, 2011

The Economist: Another Internet Gold Rush

Much like the first tech/internet bubble (created on the back of Easy Al's "Y2K" easy money policies) version 2.0 (created on the back of Easy Ben's "Everything Must be Inflated" easy money policies) will create a small handful of big winners, and a bevy of overinflated losers in the long run.  I'm not the only one saying this, but as with everything it's all about timing... via Reuters:
  •  The Internet investment scene is in the throes of a gold rush mentality that is driving valuations higher across the board based on a small number of notable startup successes, one of the venture capital industry's pioneering members said.  
  • Sky-high market capitalizations for the likes of Groupon, Twitter and Facebook are creating untenable expectations for the investors who provide the early financial backing for young web companies, Alan Patricof, founder and managing director of New York-based Greycroft Partners. 
  • "We're going through a period of irrational exuberance at the moment for the most part, which is really caused by a certain limited number of very exciting success stories," Patricof told Reuters Insider in an interview.   "It's beginning to set the benchmark of pricing for companies that go all the way down the line and may not be appropriate to benchmark off those 10 or 13 companies that everybody knows and is very familiar with," Patricof said.

I expect some great short opportunities to develop whenever the "anything social media and/or group buying is gold" fervor breaks - be it mid 2012, mid 2013 or whenever.  Until then I suppose we keep making billionaires out of Chinese founders whose companies have less revenue than the typical local Kohl's store.

The Economist weighs in with a lengthy story:
  • The return of big internet IPOs, rarities since a bubble in telecoms and internet stocks burst in 2000, and the resurgence of large mergers and acquisitions among technology firms is dividing opinion in the industry. Some veterans see a new bubble forming in the valuations of start-ups and a handful of more mature firms such as Twitter, which is still hunting for a satisfactory business model five years after the first tweet. More sanguine voices retort that many young companies have exciting prospects and that there are plenty of corporate buyers, such as Microsoft, with the money and confidence to snap up older internet firms still in private hands.
  • Yet both sides agree that the internet world is being transformed by a number of powerful forces, three of which stand out. First, technological progress has made it much simpler and cheaper to try out myriad bright ideas for online businesses. Second, a new breed of rich investors has been keen to back those ideas. And, third, this boom is much more global than the last one; Chinese internet firms are causing as much excitement as American ones.
  • Thanks to the boom’s second driving force, finance, these companies have no shortage of eager backers. Although too small to interest many venture-capital firms, they are being fought over by wealthy individual investors, or “angels” in the venture industry’s jargon. Many of these financiers made their fortunes during the 1990s bubble and are eager to put their know-how and cash behind today’s tiny companies.
  • Their cumulative impact is staggering. According to the Centre for Venture Research at the University of New Hampshire, angel investors in America pumped about $20 billion into young firms last year, up from $17.6 billion in 2009.Much of the angels’ money has gone to consumer-internet firms and makers of software apps.
  • The financing of more mature tech start-ups has also changed. Elite venture-capital firms such as Andreessen Horowitz and Kleiner Perkins Caufield & Byers have raised billions of dollars in new funds in the past year or so. Some of this money has been pumped into “late-stage” investments (eg, in Twitter and Skype), allowing companies to remain private and independent for longer than used to be the norm.

  • Much more striking, however, is that the latest round of euphoria involves emerging markets that were mere spectators during the last one, above all China. The country boasts not only the world’s biggest online population, but also its fastest-growing. The number of internet users there will rise from 457m last year to more than 700m in 2015, according to the Boston Consulting Group (BCG). And the Chinese are no longer mostly playing games, but are diving into lots of other online activities, notably shopping.
  • Albeit with a dip in 2009, the amount raised by Chinese venture funds has grown sharply, rising from nearly $4 billion in 2006 to more than $11 billion in 2010 according to Zero2IPO, a research firm. The sum invested increased from $1.8 billion to nearly $5.4 billion. Much of this went into internet start-ups.  
[click to enlarge]

  • ....some venture capitalists to argue that 2011 may be more like 1995 than 1999: if a bubble is inflating, it is a long way from popping. So investors who shun internet firms now may be missing a great chance to mint money. Jeffrey Bussgang of Flybridge Capital Partners, a venture firm, notes that venture funds raised between 1995 and 1997 enjoyed stellar returns. 
  • Others point to signs of bubbliness. For instance, some start-up firms are dangling multi-million-dollar pay packages in order to tempt star programmers from Google, Microsoft and other big companies.
  • There are also signs of irrational exuberance among some investors. Color, a photo-sharing and social-networking start-up, has been reportedly valued at around $100m by venture firms, even though it has an untested product in a crowded market. Competition among angel investors has helped drive up valuations of social-media start-ups by more than 50% in the past 12 months. Financiers are sometimes skimping on due diligence in the scramble to win deals. 
  • In China, too, the purported worth of young firms has risen breathtakingly fast—to an average of $15m-20m in first-round venture financings, which is expensive even by Silicon Valley’s standards.

[Apr 28, 2011: Social Networking Bubble Continues to Percolate - 12 Week Old Startup Company Sells for $20-$30M!]
[Apr 15, 2011: BW - This Tech Bubble is Different]
[Feb 10, 2011: Social Media Bubble Grows as Twitter Valuation Doubles in 2 Months]

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