Monday, May 23, 2011

Making of Tech Bubble 2.0?

Are you ready for another Tech Bubble like the one that you experienced in late 90's and early 2000's?

Facebook valued at $76 billion [more than the value of Boeing and Ford]
LinkedIn valued at more than $3 billion [potential market valued at $30 billion, more than the value of entire beer industry in US. Remeber the biggest revenue streams for LinkedIn are thru recruitment services/advertisements]
Microsoft buys skype for $8 billion [10 times the value of skype's sales last year]
Groupon valued at $25 billion [Groupon's underlying technology is good old 'E-Mail']
Twitter valued at $7 billion

Some of the interesting questions these valuations rise:

1. Are these companies really worth the $value or Are we entering a fresh phase of a new Tech Bubble?
2. If so, Is this new bubble different from the one that we experienced during last decade?
3. What kind of impact this bubble could create globally, in case it pops?

And there are several industry observations across Economist, BusinessWeek and Wharton such as:

1. Most of these startups or start performers are consumer-centric, technology-based utility companies than creating something foundational / core technology advancing companies [e.g. Clean Tech/Life Sciences]. Simply because the VCs or Investors are not ready to fund those non-populist business proposals. So, in a way, Silicon Valley is morphing like a Hollywood business.
2. The number of startups have increased due to affordable access to computing infrastructure - Cloud Computing (Infrastructure, platform, apps) and Wannabe startups follow the easy route of social networking, recruiting and Advertising.
3. There is a tremendous uncertainty around the revenue stream of these companies. People are willing to place bets on their upside revenue potential in future.
4. These ludicrous valuations could set precedence for unrealistic valuations of startups elsewhere in the globe - be it china or India or Europe. [E.g. Finland's Rovio - Maker of angry birds game - aspires to be next Walt Disney :-) ]
5. These companies typically work around advertising / other services. Hence they dont create many jobs. Certainly, there is a loss of manufacturing or design knowhow in services, as they are built on existing platforms/technologies.
6. Investments on very few companies mean we are not diversifying our risks and we dont have options to fall back.

So, What is the Conclusion?

As Economist says - Wait and watch with caution and Have the Wisdom to sell the stocks before its gets too late! :-) - and start to Invest in companies that create 'Thick Value'. [Value that is meaningful, created authentically and sustainable]

Also for my fellow Enterprise IT colleagues, if you are investing in any of the new age solutions such as enterprise social computing/activity stream or unified communications, make sure you have identified the opportunity/need in your company. And you are not investing just because you are inspired by the stupendous success of these above mentioned web 2.0 companies.

If Techbubble 1.0 promised that dotcoms will replace brick-and-mortar enterprises, Techbubble 2.0 claims that there is goldmine behind people who lead virtual lives in online social habitats.

1 comment:

Ram - Akshaya Investments said...

From the user point of view, lot of us got into orkut 4 or 5 years back when it was a rage among youngsters... Then we found facebook to be very more 'mature' than orkut and promptly switched to it abandoning our orkut accounts.
now its been 2 years in facebook and many have grown tired of this 'farmville' crap. Now most of us have turned into passive spectators. ie. we login, check the updates and get out. And I think this facebook has already reached its max penetration among the younger generation (even a 8th std student has a facebook account)
My perception is that its just a matter of time before everybody gets tired of facebook and move to the next new thing on web. The growth we see is just because of the new account opening activity in the emerging markets like india. It will continue to happen along with the growth of internet penetration and teledensity.
So in my opinion, the growth will be upto the point when a youngster from a remote village opens an account. After that, we will see the decline of facebook unless it transforms itself into sumthin new.
On the back of this assumption, facebook valuation nearing 100b$ is just one huge bubble!

We have our desi example of naukri which is valued at almost 1 billion dollar, but with revenues of only 60m$ . That itself is a mini bubble !

LinkedIn - When the world economy was in recession in 2008 and 2009, the established biggies shares (Microsoft, Inter, Visa) plummetted by more than 50- 60%.
These are companies whose products/services are absolutely essential to any business. Considering this, i wonder what would happen to a website company which derives revenues from recruitment services and advertising !

And regarding the acquisitions happening in IT space ( like Microsoft - Skype), the valuations appear to be absurd !
The reasons for high valuations of these companies are not financial. The biggies wants the top engineers in those companies at all costs. They say that cant afford to lose the 'supposedly bright' minds to their rival companies.
Thats y we see a lot of unknown, small companies with unproved sustainance of revenues getting sold for a obscene sum !
the valuation of the company is actually the proxy for the valuation of resource persons that company offers.

Still, it doesn make sense for the people in the stock market as the acquistion sums includes that opportunity cost of losing talent to the rival company!

This bubble, if it happens, will give 2 results. One, few 'bright minded' techies & Investment bankers will become millionaires. Two, huge number of investors will lose Billions of dollars!

God save the investors !