How Much Would You Pay For A Profitless Company?

[interestrateripoff]

http://www.guardian.co.uk/business/2011/feb/20/is-this-the-start-of-the-second-dotcom-bubble

Loss-making Twitter has been valued at $10bn. Facebook is said to be worth more than Ford. Now, for some investors, the alarm bells are starting to ring

Two years ago, anthropologist Sekai Farai was awarded a grant by Columbia University to study the technology startup community. Her timing couldn't have been better: a new goldrush is under way as twentysomethings from New York, London and San Francisco dream of making their fortunes from a new generation of internet companies.

Sitting in the lobby of Manhattan's Ace Hotel, one of new-school tech's favourite hangouts, Farai predicts the boom has just begun. "People who not long ago started startups because they couldn't get a job are turning down jobs now," she says. "There's so much money about. The idea that your idea could be the next big idea is very real. There's a real air of excitement." Could it all end in tears? "It always does."

Right now, though, who wouldn't be excited? Every week, one of the new generation of internet firms seems to attract a sky-high valuation. Zynga, the social-network games company that has tempted millions to grow virtual vegetables in its FarmVille game, has been valued at $9bn (£5.54bn). Profitless Twitter is said to be worth $10bn. Groupon, vendor of online discounts, rejected a $6bn offer from Google and is considering a flotation with a potential valuation of $15bn. Tech-watchers say this is just the start: the real boom will come when Facebook, the head boy of the new dotcom frenzy, goes public, probably next year.

This month it emerged that Facebook staff are planning to sell $1bn of private shares at a price that values the private company at $60bn – that's $10bn more than January's valuation and close to 10 times the price Russian investor Digital Sky Technologies paid employees who sold shares in 2009.

The leaps in valuation are dizzying. At its current on-paper price, Facebook's value is somewhere between that of Ford ($55bn) and Visa ($63bn). But that's still less than a third of Google's value, Facebook's arch-rival in the battle for domination on the internet.

Alan Patrick, co-founder of technology consultancy Broadsight, says we are at the beginning of another bubble and that the first breaths have been blown: "A bubble is defined by too much money chasing assets, greater production of those assets, then the need to find a greater fool to buy them."

So far, money is chasing a small group of companies – Facebook, Groupon et al – that could prove to be good investments, says Patrick, who also writes the Broadstuff blog. That was true of other bubbles too: at the start of the US property boom, for example, it was the best houses in the best locations that took off first. Only later did people start speculating on grotty flats in Florida.

According to Patrick, there are 10 tell-tale signs that a bubble is being blown:

■ 1. The arrival of a "New Thing" that cannot be valued in the old way. Dumb-money companies start paying over the odds for New Thing acquisitions.

■ 2. Smart people identify the start of a bubble; New Thing apostles make ever more glowing claims.

■ 3. Startups with founders deemed to have "pedigree" (for example, former employees of New Thing companies) get funded at eye-watering valuations for next to no reason.

■ 4. There is a flurry of new investment funds catering for startups.

■ 5. Companies start getting funded "off the slide deck" (that is, purely on the basis of their PowerPoint presentations) without actually having a product.

■ 6. MBAs leave banks to start up firms.

■ 7. The "big flotation" happens.

■ 8. Banks make a market in the New Thing, investing pension money.

■ 9. Taxi drivers start giving you advice on what stock to buy.

■ 10. A New Thing darling buys an old-world company for stupid money. The end is nigh.

This time social media is the New Thing. Its most earnest acolytes claim that the likes of Twitter and Facebook are a revolution in human communications unseen since Gutenberg started printing the Bible. They aren't making money, but they are worth a fortune. Two smart cookies – Arianna Huffington, founder of the Huffington Post, and Michael Arrington, creator of the influential technology blog TechCrunch – have sold their publications to AOL, a company not noted for the astuteness of its recent decisions. Tick off stage 1.

Forever blowing bubbles, has Twitter ever made a profit?

Still it's been 10 years since the last bubble, lessons will have been learnt and they won't be making the same stupid mistakes again.

[SarahBell]

Bubble?

Will this be dotcom bubble 2?

[DabHand]

Bubble?

Will this be dotcom bubble 2?

The world is awash with fiat with no place to go. Any bubble is feasible in these circumstances.

[blackgoose]

If industry leaders have valuations of this scale, then it is possible to dream up a scenario where they could monetize their popularity into possibly eventually paying back the valuation. When industry laggards plainly copying existing successes get valued at these levels, then we will know there is a boom.

[exiges]

If industry leaders have valuations of this scale, then it is possible to dream up a scenario where they could monetize their popularity into possibly eventually paying back the valuation.

Indeed for a long while before they launched Adsense, Google made no money at all.. but it wasn't right to say it was valueless was it ?

[Reraise]

What a terrible article, the guardian really is for economic illiterates.

[Britney's Piers]

Surely 1 could be ticked off when Murdoch bought out Myspace, he's going to take a haircut on that one.

[Fairies Wear Boots]

Surely 1 could be ticked off when Murdoch bought out Myspace, he's going to take a haircut on that one.

Myspace, that's why I wouldn't pay much for Facebook. Facebook with it's 450 million users looks like a sure fire winner, until somebody else invents something better and most people shift across as quite a few did from myspace.

I tried to find facebooks revenue. http://www.insidefacebook.com/2010/03/02/facebook-made-up-to-700-million-in-2009-on-track-towards-1-1-billion-in-2010/

This old article reckoned it'd be a billion in 2010, so if they value it at 60 billion, that's pretty low yield. Especially if someone else comes up with a better idea.

[cica]

Myspace, that's why I wouldn't pay much for Facebook. Facebook with it's 450 million users looks like a sure fire winner, until somebody else invents something better and most people shift across as quite a few did from myspace.

The biggest threat to Facebook is a mobile peer to peer. Limited possibilities right now but things change quickly.

[Authoritarian]

What a load of old ********. Who's valued twitter at $10bn? These companies aren't even listed FFS, I reckon Twitter is worth $50bn, there you go Guardian you can quote me on that if you like.

A couple of (possibly) bloated companies does not a bubble make, they need to search a little deeper.

[Bear Goggles]

Bubble?

Will this be dotcom bubble 2?

I think you'll find it will be dotcom bubble 2.0

[VeryMeanReversion]

What a load of old ********. Who's valued twitter at $10bn?

A little bird told me.

[eek]

When these valuations appeared last week it was accompanied by a couple of decent articles that explained why the companies had the valuations they had:-

Twitter is a company that fits in well to both Google and Facebook. And if one owns it, it causes problems for the other one (hence a bidding war for the profitless company).

Facebook could be the internet for many people. Add on the fact that it has a working advertising system and a working payment system and its just about plausible that it could make profits of billions a year a few years down the line. Whether that means its worth $60bn is a good question but it could be the only player in town.

[rxe]

I find myself in the same position as I did in 1999/2000. I appear not to understand the new world and everyone else is getting it, and creating multi billion pound companies out of nothing. I was right last time, and I think I'm going to be right this time.

Advertising. Clearly worth money, but how is it worth hundreds of billion? That feels like it is bigger than the entire advertising industry.

Revenue. Where is the money coming from? Oh yes, advertising and the mythical "sticky eyeballs".

Subscribers. Make people pay for the service, and how many will you keep. How many people would pay £50 a year for Facebook?

Answer these questions and you have a valuation.

Yes, there are many people out there for whom the "internet is Facebook". However, such people aren't that bright, and the thick tend not to have much cash.

[The Eagle]

Facebook's valuation is based on the price that Goldman Sachs (yes it's always them...) paid for a small share of Facebook they bought.

GS will be leading the IPO for Facebook (so their interest is in setting a high valuation for Facebook, which they did with their share buy).

Furthermore GS has been selling on their small share of FB they bought to interested investors (surely at a premium to what they paid for it).

Twitter's valuation is based upon Facebook's valuation.

As you can easily see this is a very obvious and classic SCAM, so typical for an investment bank these days.

Once FB will be a publically traded, after an initial hype period reality will set in and the stock value will drift down (or crash), of course after GS has made a mint on the IPO, leaving long-term investors with the losses. Long-term investors will most likely include our pension funds and mostly normal clueless investors.

When will we put finally put an end to these scam artists that call themselves investment banks?

---

Edited February 21, 2011 by wise_eagle

[Reck B]

I find myself in the same position as I did in 1999/2000. I appear not to understand the new world and everyone else is getting it, and creating multi billion pound companies out of nothing. I was right last time, and I think I'm going to be right this time.

Advertising. Clearly worth money, but how is it worth hundreds of billion? That feels like it is bigger than the entire advertising industry.

Revenue. Where is the money coming from? Oh yes, advertising and the mythical "sticky eyeballs".

Subscribers. Make people pay for the service, and how many will you keep. How many people would pay £50 a year for Facebook?

Answer these questions and you have a valuation.

Yes, there are many people out there for whom the "internet is Facebook". However, such people aren't that bright, and the thick tend not to have much cash.

The pool of thick people is so vast that you only need to extract a small amount of cash from each to be very succesful.

E.G The creator of this tat did ok.

[The Spaniard]

Once FB will be a publically traded, after an initial hype period reality will set in and the stock value will drift down (or crash), of course after GS has made a mint on the IPO, leaving long-term investors with the losses. Long-term investors will most likely include our pension funds and mostly normal clueless investors.

No doubt GS will have quietly shorted the shares by this stage.

[Saberu]

Advertising. Clearly worth money, but how is it worth hundreds of billion? That feels like it is bigger than the entire advertising industry.

Advertising IS worth hundreds of billions. Or marketing as I like to call it is the very essence of bringing people together and it's also the biggest influence on whether you make a sale at the end of the day.

The interesting thing is Google is a company which makes billions of dollars per year and yet their search engine makes 100s of billions per year for the worldwide websites that it's sending traffic to.

Google also have the power to quickly take a much greater share of those billions but the reason they aren't doing so is firstly because it would be a logistical nightmare and secondly because if they encroach too much on their Adword's customers businesses they would lose their primary income from advertising.

[SarahBell]

The biggest threat to Facebook is a mobile peer to peer. Limited possibilities right now but things change quickly.

The unshutdownable social network is what will be the one that wins.

One that the govts can't control.

[Saberu]

The unshutdownable social network is what will be the one that wins.

One that the govts can't control.

Not saying I agree with this but that's exactly the type of network he was saying, peer to peer networks do not require a central server to communicate with. That's why a lot of people were excited when peer to peer technology was introduced to software like uTorrent.

I think that's what's described here- "distributed hash table (DHT) a class of a decentralized distributed system that provides a lookup service similar to a hash table".

So it's even more intelligent than peer to peer, it's like a distributed network of clients working together.

[Tonkers]

On one of my regular USA music bizz newsletters they report a lot of money is flowing into incomprehensible start ups, with all the historical and current evidence pointing to a catastrophic loss down the road. Dot Com Bubble - The Sequel.

[hedgefunded]

Not saying I agree with this but that's exactly the type of network he was saying, peer to peer networks do not require a central server to communicate with. That's why a lot of people were excited when peer to peer technology was introduced to software like uTorrent.

I think that's what's described here- "distributed hash table (DHT) a class of a decentralized distributed system that provides a lookup service similar to a hash table".

So it's even more intelligent than peer to peer, it's like a distributed network of clients working together.

It still needs a network, and as the Egyptians discovered, the whole lot can be switched off in seconds.

[scepticus]

I don't see what all the fussing is about. Major new international market segments always cause over excitement and over-investment. But when the bubble bursts (as long as that bubble does actually deliver real world good and services, which all this web 2.0 actually does), the good stuff will be left and the fluff will blow away on the winds of whatever the next big thing is.

Take a look at the internet tools you are using now, compared to how they were in 1999 and have a long hard think about the difference.

The faux outrage shown in this thread makes you seem IMO like spoiled brats - because without all of this over-excitable market activity and 'new things' you wouldn't be here typing this rubbish into this internet forum.

Some of you lot really need to get some perspective.

[scepticus]

Not saying I agree with this but that's exactly the type of network he was saying, peer to peer networks do not require a central server to communicate with. That's why a lot of people were excited when peer to peer technology was introduced to software like uTorrent.

I think that's what's described here- "distributed hash table (DHT) a class of a decentralized distributed system that provides a lookup service similar to a hash table".

So it's even more intelligent than peer to peer, it's like a distributed network of clients working together.

true P2P is the next real advance to be made.

P2P credit and payment clearing networks will come along before very long.

[Bloo Loo]

these valuations are not about the firms, they are about the sale of shares...so wall street can profit by being in on day 1, and exit on day 2 when the plebs have bought in on the "deal of the Century"