The New York Times reports that banks are pouring money into technology funds, wealthy clients and institutions are clamoring to get pieces of start-ups, expectations of stock market debuts building. As the Wall Street machinery kicks into second gear, some investors with memories of the Internet bust a decade earlier are wondering whether this sudden burst of activity spells danger for the industry once again.
With all this exuberance, valuations are soaring. Investments in Facebook and Zynga have more than quintupled the implied worth of each company in the last two years. The social shopping site Groupon is considering an initial public offering that would value the company at $25 billion. Less than a year ago, the company was valued at $1.4 billion.
“I worry that investors think every social company will be as good as Facebook,” said Roger McNamee, a managing director of Elevation Partners and an investor in Facebook, who co-founded the private equity fund Silver Lake Partners in 1999 at the height of the boom. “You have an attractive set of companies right now, but it would be surprising if the next wave of social companies had as much impact as the first.”
The NYT points out the example of the online grocer, Webvan. WebVan was one of the most highly anticipated I.P.O.s of the dot-com era. The business had raised nearly $1 billion in start-up capital from institutions like Softbank of Japan, Sequoia Capital, and Goldman Sachs. Goldman, its lead underwriter, invested about $100 million. On its first day, investors cheered as Webvan’s market value soared, rising 65 percent to about $8 billion at the close. Less than two years later, Webvan was bankrupt.
Thomas Weisel, the founder of an investment bank called the Thomas Weisel Partners Group that prospered in the first Internet boom, says he is “astounded” by the amount of money now flooding the markets. “I think it’s much greater today,” he told the NYT. “The pools of capital that are looking at these Internet companies are far greater today than what you had in 2000.”
Yet there are notable differences between the turn-of-the-century dot-com boom and now. For one, the tech start-ups that have attracted so much interest from investors have real businesses — not just eyeballs and clicks. Companies like Facebook have fast-growing revenue. Groupon, which has been profitable since June 2009, is on track to take in billions in revenue this year reports the paper. And since 1999, when 248 million people were online (less than 5 percent of the world’s population), broadband Internet and personal computing have become mainstream. About one in three people are online, or roughly two billion users, according to data from Internet World Stats, a Web site that compiles such numbers.
Today, the collective amount of money that Wall Street banks are pumping into Internet start-ups, on top of the surging cash piles from venture capital groups, hedge funds, and private equity, is a major concern for some investors.
Over the last five months, the NYT says many venture capital players have raised giant amounts of capital. One Facebook investor, Accel Partners, is about to raise $2 billion for investments in China and the United States, while Bessemer Venture Partners will be closing in on $1.5 billion for a new fund. Greylock Partners, Sequoia Capital, Andreessen Horowitz, and Kleiner Perkins Caufield & Byers have collectively raised more than $3 billion in the last six months.
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I can do my job without the social networker, I think the infographic above show that the VCs are no better than Wall Street, moving in a herd to Facebook. At least in 1999, the VCs were all over the place now they have settled on 5 firms.
They certainly have not made it easy for any other new ideas to get funded. The VC community has also concentrated its risk on these firms. All of these firms may be sexy on the coasts, but the only one that is relevant to me in Detroit is LinkedIn.
What do you think?
Is it 1999 again?
Ralph Bach has been in IT long enough to know better and has blogged from his Bach Seat about IT, careers, and anything else that catches his attention since 2005. You can follow him on LinkedIn, Facebook, and Twitter. Email the Bach Seat here.
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