The next bubble?

1 February 2011

The next bubble

Winston Churchill once said: “If there is one thing we can learn from history, it is that we do not learn from history.”

Truer words are rare.

Lets cast our minds back to 1996. The Internet was in its infancy, shrugged off as a passing fad.

Then came the Netscape IPO.

The world woke up to the biggest game-changer since television. The ultimate new medium, capable of creating value from nothing. Geeks in their 20’s disrupting century old businesses and creating billion dollar valuations overnight. Netscape, Amazon, eBay, Yahoo!, AOL and Cisco.

At the peak of the bubble Cisco was valued at $270billion…

On 10 March 2000 the bubble popped, bringing down some of the craziest kites ever to be flown. One of the more tragic casualties was www.digiscents.com, a site aspiring to transmit scents over the web.

But emerging from the ashes were some tried and tested Internet business models and corporate giants. Creative destruction at its best.

Fast forward to December 2010. Google makes a $6billion bid for a 2 year old company called Groupon. Goldman Sachs values Facebook at $50billion. Everyone you talk to nowadays is talking about a new tech bubble and dismissing it out of hand.

You do so at your peril.

History is repeating itself. In a world of zero-interest returns on deposits, high inflation and cash-rich companies, the Groupon and Facebook valuations have once again awoken investors to the one industry where value is created by making the pie bigger.

This time, however, investors won’t buy into www.pigsareus.com. They’ve seen that movie. People simply don’t buy pigs online. But they’ve also seen the Facebook and Google movies. Show me community, show me data, show me a revenue model, and I’ll show you the money.

Value is based upon user numbers and an ability to show revenue, however small. The average yardstick for valuations of annuity-income businesses is 20x revenue, and growing…

I hear you crying, “What about profit?” The answer is, “Don’t panic. If you show me users and revenue, the profit will come. And it will be big. And the more users you have, the more defensible your business is.”

So is the Facebook valuation wishful thinking? I don’t think so. Even if they never reach the profit required to justify their price, the next 4 years will be a bull run in tech. And in the bull run, prices will keep going up, regardless of profit.

2011 will be like 1996, and the LinkedIn IPO will be like Netscape. It will trigger a deluge of listings. Groupon and Zynga will be close behind. The monster IPO will be Facebook, and Zuckerberg won’t be able to delay past 2012. You can count on a $200billion plus valuation for that one.

The anticipated IPO boom has already opened the capital markets of Silicon Valley like a ripe avocado. According to Priya Haji, founder of World of Good, “If you live in San Francisco you can raise $1million on a 1-page business plan.”

The flood of capital will fund the next generation of tech giants. Who will be the biggest brands and revenue generators in 2015? Google? Maybe, but I’m willing to bet there will be some surprises. Bill Gates famously said, “I’m not afraid of any of our competitors, I’m afraid of a couple of guys in a garage somewhere out there making something that will change the game.”

1 year later Google launched. 10 years later the market dismissed Microsoft as having missed the search and social network boats.

Exciting it is. Risk-free it is not. Those who are tempted to walk into these waters, keep in mind the immortal words of Clint Eastwood, “Do you feel lucky, punk?”


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