They're the four words that should strike fear in all investors' hearts and send them fleeing to the nearest bomb shelter: "This time is different."
Yet that is precisely the argument being made by some prominent experts to describe the coming wave of initial public offerings by internet companies. In the next two years, Facebook, Zynga, Groupon and LinkedIn are all likely to go public. Web publisher Demand Media is set to kick off the party later this month.
The impending public offerings, and the eye-popping valuations being discussed in conjunction with them, have given some observers flashbacks to the dot-com bubble of 1999-2000 and the subsequent market crash that wiped out scores of companies and billions of dollars in shareholder equity, and plunged the United States into a recession.
Ten years later, the circumstances seem somewhat different. Most of the premier internet startups of 2011 are generating significant revenues, and more importantly, profits. Broadband internet access is now nearly ubiquitous, and e-commerce has matured into a central component of the U.S. economy. Millions of people spend much of their day online, and the web has emerged as a critical communications tool for companies, governments, and everyday people.
Let's take a look at Facebook. With a staggering 650 million users worldwide, this juggernaut looks unstoppable. Some skeptics argue that Facebook is likely doomed because internet users are fickle, and the breakneck pace of innovation will inevitably spawn a new social network that will supplant Facebook, much as Facebook supplanted MySpace, which itself replaced Friendster.
In fact, it's just the opposite. Unlike search engines, which are not inherently sticky -- you can switch from Google to Bing in a blink -- social networks, particularly Facebook, are very sticky.
This is because hundreds of millions of people have uploaded over a billion photos on Facebook and posted all kinds of personal details about their lives there. These people are invested in Facebook. Their lives literally exist on Facebook. You can see this in the "time spent" metric, which is soaring for Facebook.
Facebook passed Google last August in user time spent for the first time in history, racking up a hefty 40 billion minutes.
"It's very hard to leave Facebook when all of your friends and family are there," said Charlene Li, founder of Altimeter Group and an authority on emerging technologies.
There's also been some hand-wringing about the fact that Facebook is a free service. But this views Facebook's users as customers when, in fact, they are the product. Facebook is selling you.
And advertisers are lining up to buy you. You have to give credit to founder Mark Zuckerberg and COO Sheryl Sandberg, who helped build Google's advertising business prior to joining Facebook.
People talk about Facebook aspiring to become the internet or a parallel internet. That's not quite accurate. What Facebook wants to do is place a layer -- a social layer -- over and on top of the entire internet, and then give advertisers access to that layer. And they've been quite successful in doing just that.
So is Facebook worth the $50 billion that Goldman Sach's recent $450 million investment and $1.5 billion private placement implies? Citing media scrutiny, Goldman announced Monday that its U.S. clients would not be able to invest in the Palo Alto, California–based company. With an estimated minimum net worth of $30 million needed to invest in Goldman's Facebook private placement, presumably that leaves Chinese venture capitalists, Russian oligarchs and Saudi princes.
Some prominent internet experts think Facebook could ultimately be worth more than $50 billion.
"I don't think anyone should bet their net worth on Facebook at $50 billion, but I think it is a pretty good bet that Facebook will one day be worth more than $50 billion," prominent New York venture capitalist Fred Wilson wrote Friday.
Wilson said he's been recommending that friends with accounts at Goldman's private-client-services division to get in on the private placement. It's striking coming from someone who has been vocally saying now for months that the internet startup sector is "overheated," but Wilson admits that he hasn't "completely reconciled those thoughts."
Veteran technology journalist and entrepreneur John Battelle, who knows the last 15 years of internet history as well as anyone, is similarly bullish about the current crop of web offerings. In a recent post titled "No, in Fact, We Haven't Seen This Movie Before," Battelle tried to push back against some of the critics issuing stern warnings of bubbles and out-of-control valuations.
"Back in the dot-com era, most retail internet investors were buying on the come, on promises that the hand waving and affirmations of Web 1.0 entrepreneurs would magically come true," wrote Battelle, who, among other exploits, co-founded Wired magazine. "Almost none of the companies that went public back then could boast the metrics today's private winners do."
"Truth be told, the promises of the internet hand wavers are coming true," he added, "but for investors in the 1990s, it's a decade too late."
Given the misery of the dot-com crash, it's very understandable, and indeed appropriate, for investors to be cautious ahead of the coming wave of web public offerings. It is absolutely paramount that investors carefully read the registration documents (here's Demand Media's S-1) before investing.
These valuations may look massive, but as they say on Wall Street, "Don't fight the tape."
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See Also:
- Facebook Faces IPO or SEC Disclosure in 2012
- Goldman Infusion Values Facebook at $50 Billion, Virtually Assures IPO
- Goldman's Facebook Offering: Americans Need Not Apply
- Goldman's $50 Billion Facebook Valuation Is No Bargain
- Goldman Closes Facebook Fund After Billions in Orders Pour In
- Snubbed by Google, Goldman Sachs Manages to Friend Facebook
- Goldman-Facebook Deal Draws SEC Scrutiny of Startup Investing
