Summing Up
Is "Collateral Damage" from Economic Bubbles Inevitable, Necessary, and Useful?
According to the old saw, markets are made by differences of opinion. If that's the case, there is a real market around the question of whether we are approaching another bubble in the high tech information and social networking sector.
Several respondents to this month's column argued that we are. As Kamal Gupta put it, "Facebook's valuation was explained to me by people I consider smarter than me as valuation of its database. The same thing is being said about Whatsapp. So now Facebook has a huge mine of data. Reminds me of the California Gold Rush. The only ones to make money out of it were land owners, shovel vendors, and Levi." Tom Dolembo added: "It's like the financial groundhogs have all come out and didn't see their shadow. There is a recent sudden effort to monetize concepts, many of them apps for Android and IOS, driving doubtful revenue models in packed market segments with little differentiating code."
Nol Perreira asked, "What will prick the bubble? The timing of that is, one might say, whimsical. I think the initiating event (which could occur at any time) will be something that awakes the investor that there is a real time value to money, and it might be better to get some current returns…." Konstantin Tryapitsyn suggests what might prick the bubble. "I personally believe that some natural limits always exist and that customer behavior can change. The burst will be when we will observe that consumer patterns are changing."
On the other hand, some believed that things that have changed since the 2000 bubble may make another one less likely. Ofer Vexler said: "Unlike (the) situation in (the) 90s, today's Internet (mobile) businesses and users (have) already evaluated the benefits… (and) … analysts' valuations can be more predictable …" Shankar N. Mandapaka added: "The earlier dot.com bubble was due to lack of proper valuation mechanisms to capture traffic and customers. In the last 10+ years there has been an increase in the use of (the) Internet, and users are well aware of the importance of certain applications and services." AIM agreed that: "compared to dot.com bubble days we are living in a much broader information based society that necessitates transparency…not only is the quality of information better but the speed as well."
Ralflippold felt we will face a bubble at some time, but suggested that bubbles have a positive side to them, that they are on one side of a fine line, a line that is beneficial to walk. As he put it, "Doing business as 'normal' would never bring any innovation on the table. Disrupting through economic bubbles all the time would never establish the stable foundation that is necessary for the functioning economy." The question is, "how can they (be) made stable and innovative at the same time?" This more constructive view of the bubble phenomenon in markets suggests a question for further consideration.
Is "collateral" damage from tech bubbles inevitable, necessary, and useful? What do you think?
Original Article
The recent purchase of WhatsApp by Facebook for a reported price equaling $345 million per employee prompts me to ask the question above. It also brings back vivid memories of the last bubble, seen from the inside.
In the spring of 2000, signs of the end of a dot.com bubble were all around us. As a director of an Internet-based startup, PlanetFeedback.com, I met with our board in the only meeting room for that purpose at Flatiron Partners in New York. Companies in which Flatiron had invested scheduled the room, one after another, for their board meetings.
In our case, we had moved our meeting to New York to discuss growth and the next round of financing for the company. Our leadership, alumni from Procter & Gamble's online operation, carefully laid out plans in which they estimated they would need a next round financing of $30 million. The representative from Flatiron indicated his partners would like to see a proposal. When our CEO replied that he could have something in a couple of weeks, our host shot back, "A couple of weeks! Put something down on a sheet of paper and give to me before you leave today." We received the money in early June, just as the entire high-tech bubble was popping, pulling much of the stock market down with it. In true P&G fashion, our management nursed the money through the worst of the downturn.
The story doesn't end there. On our way out we were introduced to the management and directors of the startup that had the room reserved after us, kozmo.com. Their average age was in the early twenties. Kozmo.com took orders over the Internet and promised one-hour delivery of a wide range of products, including an entire evening's complement of food and videos, with no delivery fee and at a price roughly equal to what one would pay at retail. As it turned out, the business model was really selling $10 bills for $5. But kozmo.com also got its money (including $60 million from Amazon) and managed to run through $250 million of venture capital before shutting its doors just 14 months later. The next time I met the CEO was as a student in my MBA classroom.
During my visits to Silicon Valley before the last high-tech bubble, the yardstick for acquisition price was also price per employee. The use of the measure seemed to subside when investment activity once again focused around startups rather than M&A. But now that the most wildly successful of those startups have accumulated a lot of cash themselves, acquisitions and the price paid per employee are once again fueling headlines. (A better yardstick might be price per user, which in the case of WhatsApp was about $40 for a service with no advertising and a revenue stream of $1 per year from those users not getting it free.)
How will we know when we are near the end of the next high tech bubble? When the Nasdaq finally makes it back to the highs it registered in 2000, perhaps this year? When investors stop cheering acquisitions like that of Facebook's? (They actually bid the price higher the day after the announcement.) When the website kozmo.com announces that it will relaunch soon (which, according to Wikipedia, it did last September)?
When will the next dot.com bubble burst? (Or does even the use of the term, dot.com, date me?) What do you think?
- RalfLippold
- Co-Founder, HTxA - High Tech x Agency
Bubbles in one way are necessary to level the difference between reality and vision, on the other hand they destroy interwoven networks, and processes.Creative disruption would be the best term to name it.
The root cause of it has been always a knowledge differentation due to "intransparency". All the financial and economic transaction networks are build on more or less stable processes.
The question that stays, how can they made stable and innovative at the same time? Doing business as "normal" would never bring any innovation on the table. Disrupting through economic bubbles all the time would never establish the stable foundation that is necessary for the functioning economy.
What to do? Why not prototyping basic income in this context?
- Tom Dolembo
- Founder, New North Institute
I think you have something. It's like the financial groundhogs have all come out and didn't see their shadow. There is a recent sudden effort to monetize concepts, many of them apps for Android and IOS, driving doubtful revenue models in packed market segments with little differentiating code. These will load the deal pool, which is drawing cash from the sidelines looking to beat oddball gimmicks like Bitcoin. I think what may happen is a trample at the exits, where the deals just get hammered down in place, the segments tip over and crash as a group. Valuations seem to spike to extravagance very quickly. We're seeing expectations soar, looking mainly to cash heavy tech companies needing to move to the cloud or on mobile platforms. I'm not seeing the big VC's riding the wave, they were seriously burnt. I am thinking this stage is a "mullet" play, where money without a place to go for return looks for a Hail Mary. The value proposition just is not there in many cases, no matter how it is sliced and diced. I'd suspect it'll happen after a spike in May, after first Quarter looks to be weak, looking for a real massacre in August.
- Ofer Vexler
- CEO, Vexler, CPA's & Capital Advisors
The dot.com bubble back. However its impact is different than the previous dot.com . Unlike situation in 90x, today's internet ( mobile) businesses and users already evaluated the benefits, analysts valuations can be more predictable and the market has really growth.- Gary Helms
- Retired-private investor
We're not even close to dot.com conditions. The public investor isn't in these deals yet-in fact the mutual funds aren't in them. The hedge funds are playing reluctantly and with a very jaundiced eye, as best I can determine. They may buy a no-earnings, no-sales spec as a trade, but they flip it quickly.The only true buyer and holder of this stuff that I see is the strategic buyer: the corporate line extender or competitor eliminator using his own highly valued security or cash horde as currency.
The public will eventually drink this Kool-Aid again.Right now, they don't aren't even thirsty.
- Andrew Goldberg
- SVP Marketing & Strategy, Dialogic Inc.
I agree with Professor Heskett's perspective that the valuation criteria on the WhatsApp deal are rather stratospheric, but one has to also acknowledge that strategics justify their purchase price on what they can do with the asset rather than how the asset was performing pre-deal. Heskett mentions that Facebook paid $40 per subscriber but in the US, a text subscriber is worth $440 per year ($20/month for unlimited SMS) so perhaps the price paid is a discount, assuming they have their own monetization strategy. In addition, Facebook may aspire to offer a broader array of mobile-based services and, given the weakness of its own Messenger solution, saw WhatsApp as a price of entry to global messaging, especially in emerging markets, and far less expensive than acquiring a mobile carrier of its own. Alternatively, Facebook also has to hope that WhatsApp doesn't become a DrawSomething (acquired by Zynga) where subscribers leave in droves because it's not cool anymore. What's also missing is whether Facebook was in an auction and made the move for competitive purposes, but with a very high walkaway price. It's hard to imagine that WhatsApp would not have accepted $1billion or $10billion, let alone the price paid, unless another acquirer, such as Google, Yahoo or Baidu was in the mix. Only time will tell. As for the bubble, I think the market has been a harsh partner, as of late, punishing once magical growth stocks such as Groupon, and has been doing a good job of regulating itself.
- Shankar N Mandapaka
- Director, MASTIC Consultancy Services Private Limited
The earlier dot com bubble was due to lack of proper valuation mechanisms to capture internet traffic and customers. In the last 10+ years there has been an increase in the use of internet, and users are well aware of the importance of certain applications and services even though business models engaged in running such applications or services dent revenues elsewhere. I see the impact of such mergers and acquisitions will result in mass movement of the customer base from one section of industry to another.- Konstantin Tryapitsyn
- VP, Business Development & Private Equity, FinEx
Good questions. In my opinion the growth of internet sector in last years is the example of the basic economical observation that in contrast to food and material goods the services yet do not have any limit of consumption. This belief fuel the evaluations of the companies and the stock prices.So the question is do we have the bubble or just some kind of new economical model with unlimited consumption?
I personally believes that some natural limits always exists and that customer behaviour can change. The burst will be when we will observe that consumer patterns are changing, for example a couple of weeks ago I was surprised by the data that 14-16 years old Americans prefer to paper books to e-books. My 15-years old son, also start to consume less and less Xbox and social network and allocate more time for new sports and guitar classes. I'm surprised and proud of his free choice but still do not have enough evidence that it is a new trend.
- Mahesh Mulchandani
- Sr. Project Manager
Monetising Customer transactions in Internet and interconnected world is a big challenge and businesses would be have to pay heavy price for overvaluing or unable to get the required revenues.For eg. $40 per customer wherein each customer paying $1 looks a fair math, but we should keep in mind email which is available to large section of customers for free and companies who have tried charging have lost a significant portion of their customers.
However i believe that large section of customers are going to be hooked to net thru their cell phones and larger number of transactions would be done thru this medium eating a large chunk of retail sales. Smartphones would also be able to help create new services for these connected users based on real time information and analytics.
- Aim
- Drilling Engineer, N/A
A lot of important points have been made related to valuation mechanisms. I would also like to add that compared to dot.com bubble days we are living in a much broader information based society that necessitates transparency. Furthermore, not only is the quality of information better but the speed as well. Couple that with recent experiences from the late crash, it seems like investors will be more demanding as to the end destination of their funds. Besides, whatsapp is only one purchase that seems like competed away from someone else (I agree with the earlier made auction statement) and does not constitute the main stream, whereas in dot.com days there was a global "rush" into a virtual world of connectivity. So, in my opinion it may be prudent to come up with a larger sample size of m&a's; evaluate them according to our own assumptions (as we would not be as biased perhaps as the acquirers) and compare the difference paid.
- Kamal Gupta
- CEO, Edseva
I was a worried person when the previous dot com bubble was building up. As a conservative businessman, I could not see the sense behind sky high valuations for companies that had meagre revenues and no ways of making profits. That bubble ended in a bath of blood.Fourteen years later, I see a repeat of the same thing happening. Maybe my brains are getting foggy, but I can see no way of Facebook investors making money. And I am aghast at Whatsapp's valuation. I can only describe Facebook's acquisition of it as squandering.
Facebook's valuation was explained to me by people I consider smarter than me as valuation of its database. The same thing is being said about Whatsapp. So now FB has a huge mine of data.
Reminds me of the California Gold Rush. The only ones to make money out of it were land owners, shovel vendors and Levi.
- Nol Perreira
- Owner, Perreira Properties
Remembbering back to 1999-2000 and an attempt o be a broker at Paine Webber, I remember the pre-bubble days. Though I have a couple of Science/Emgineering degrees, and had worked with computers from 1966, I could not find it in me to convince people to invest in companies selling at astromaumical multiples of sales, not to speak of P/E ratios belonging in Oz. We are clearly in bubble territory now. But what will prick the bubble? The timing of that is, one might say, whimsical. I think the initiating event (which could occur at any time) will be something that awakes the investor that there is a real time value to money, and it might be better to get some current returns (dividends). Managing a family trust for income has not made me indifferent to growth, just more cautious.- S K Kotwani
- Vice President, IndusInd Bank Ltd.
I believe we should not compare the current stage of dot.com with the one prevailing in 2000.Dot.com is now an widely accepted mode of business with millions of transactions taking place - day in and day out.
So the question of dot.com bust does not arise since it is now an additional channel of technology enabled business to enter into transactions as a complementary to existing modes like face to face etc.
The valuation is based on investment in technology that has enabled reach to wider community and its acceptance and hence expected revenues.
- judith delaney
- Founder/Principal new media compliance strategist, CMMR Group-TurnsonPoint Consulting
The "dot.com bubble" will happen when the majority of consumers stop providing on a large scale their personal and private data and all other data they post everyday or provide to get a google or facebook or instagram account when they realize that their data has become those entities "product". A "product" that is sold over and over again by these and other social media platforms to advertisers and other third parties culmnating in billions of dollars of revenue.- Anonymous
- independent thinker, bubble machine
My guess is sometime between 2015 and 2016, bubble will pop.1) Federal Reserve already started to tighten money supply by sticking with planned taper of QE. At the end of 2014 QE will no longer exist and it will be time to raise the rate itself. That's when money moves away from risk all across the asset levels and the hardest hit will be the tech startups with no revenue.
2) Another harbinger is when finance partners themselves start to cash out with an IPO of a partnership. 1999 was Goldman Sachs, 2014 is Moelis & Co.
3) Presidential election coming up in November, 2016. Barack & Democrats no longer need to entice Janet & the Fed to keep the interests low allowing Fed to raise the rates.