The Wall Street Journal recently highlighted the valuations of three leading dot coms, all born since the start of the new century: Facebook ($70bn), Groupon ($15-20bn) and Twitter ($8-10bn).
The stock markets are once again wide open for digital business. Networking website LinkedIn has valued the business at more than $4bn, this for a company which made losses from 2007 to 2009, managed to turn profitable in 2010 to the tune of $15.4m but predicts to be back in the red again this year. Another money loser is online luxury discount goods retailer Gilt Groupe. It has not made a profit since it was founded four years ago but recently enticed a VC investment round of $138m at a valuation of $1bn.
Established digital businesses are also benefitting from the surge in investor confidence. Skype is selling to Microsoft for $8bn. In 2010, Skype recorded $859.8m in revenue but reported a net loss of $7m. Just six years ago, eBay purchased the same company for $2.6bn which earned the then CEO Meg Whitman a drubbing from such authoritative critics as The Economist.
In one industry sector with which I am very familiar, travel, valuations too continue to rocket. Priceline shares for example have soared over the past 12 months. Its market capitalisation now exceeds $26bn – more than the three largest US airlines combined. Expedia has announced that it is splitting itself into two, hiving off its Tripadvisor subsidiary into a separate public entity. If Expedia chairman Barry Diller, one of the world’s canniest investors, sees that the market is sufficiently hot to undertake this split, is it time for us mere mortals to panic?
Are we now in a time similar to 1999-2000? Then, spurred on by the enthusiasm of industry savants such as Mary Meeker and Henry Blodget, valuations skyrocketed only to lead to a fall-out that is still popularly described as the ‘dot com collapse’. Shares in the dot com industry went from gold dust to dust, inviting comparison to shares in Dutch tulips or the South Sea. Dot com CEOs went from heroes, in many cases literally, to zeros.
There are many significant differences now. Whilst undoubtedly there will be failures –as there are in any industry - overall the digital sector is in fantastic shape. In many cases (and I would include some but not all of the above) the valuations are indeed merited. Take LinkedIn for example: it gains a new member every second and now has more than 90 million total members worldwide, 40 million in the U.S. and 50 million internationally. That is nearly double the members it had in 2009. I can see where the money is coming from too: recruitment, targeted adverting and premium subscriptions. However, I am not so sure about either Groupon (it operates in a very competitive environment) or Twitter. Although I am a devoted user of the latter, I cannot see how it can become profitable enough to merit an $8-10bn dollar valuation.
So why do I remain an internet optimist (and investor)?
It is self evident, as Netscape Founder Marc Andreeson said recently, that “ the ideas on the internet in the 1990s are all happening now”. As recently as ten years ago in the developed world internet access was limited, agonisingly slow and expensive. Much of the developing world had no digital access at all. Now we have Twitter and Facebook (apparently) as catalysts for mayhem on the streets of Cairo, Tehran, Damascus, Manama and Tunis.
Most importantly of all, in the 1990s, there were few really rock-solid companies at which one could point and say ‘now that is a real, sustainable business’. Today the US has scores: Google, eBay and Amazon to name but the most prominent. Even in our own austerity Britain, ASOS and RightMove, amongst others, have enjoyed an excellent and consistent track record since they went public.
Digital business is one of the few exciting growth opportunities around: savvy investors and entrepreneurs know that this time things really are different.
David Soskin is the co-founder of Howzat Media LLP and sits on the boards of several internet companies, including Cheapflights Media, of which he was CEO from 200 to 2008. His book Net Profit has been published by John Wiley & Sons.