Next Tech Boom
How has everything changed since the Dot Com Boom
The guest post was written by @thomasdoane, who is a freelance writer, consultant, and expert in International Shipping systems.
Groupon filed for IPO status on June 1st, a few weeks after LinkedIn’s stock-debut hit the ball out of the park, selling off their stock at 200% of the expected price per share their first day up to bat. Trading in LinkedIn stock that day has been described variously as a ‘feeding frenzy’, ‘an uptick’, ’an orgy’, ‘a triumph’, etc. The media has been buzzing with ominous forecasts about ‘the coming tech-bubble.’ Groupon’s filing for IPO status feeds into this dense admixture of excitement and paranoia. Surely Facebook will be next.
Groupon’s offering price is $750 million. But don’t be fooled: this number is just a place-holder that’s been tamped down to help calculate filing fees. To put things into perspective, LinkedIn’s asking price was $175 million and on its first day in the market it was valued at $9 billion, a valuation exceeding its penny ante by a multiple of 51. If these proportions are in anyway predictive of Groupon’s valuation—it is hard to say whether Groupon will fall short of or exceed LinkedIn’s exponential valuation—then, hypothetically, Groupon could expect to be valued at $38 billion once its brought to market. In that case it would certainly outrun the $6 Billion dollar offer that Google made to buy out the company last December. But that’s science fiction at this point. Certainly it hasn’t happened yet, nor is it likely to happen at that level.
Groupon’s debut is, however, likely to dwarf Google’s 2004 debut, when the search engine giant raised $1.4 billion on its first day. At that should be enough to give us pause. While Groupon has shown great earning potential can its functionality and potential profit be compared to Google’s? Probably not.
Nevertheless, I’d like to argue that whether or not we’re entering a bubble, we are not entering a bubble that has anything much in common with the dot com bubble. The difference is that the services that are now coming to market actually have proven strategies and are already seasoned, and profitable. That is a stark contrast from what we went into in 1995 and came out of—painfully—in 2000.
What is the essential difference? Groupon’s deal delivery system is incredibly sophisticated, highly functional, and its projections are credible. While rising competitors create some unknowns, generally speaking, Groupon is a known quantity. Like international shipping, it is a global network bringing packages especially intended for you to your door. And it provides a real service. Dot com’s expected people to come to them and all they provided when you got there was a bunch of cheesy ad-images and links. The sort of thing that doesn’t even fly on a self-respecting blog today.
A Problem of Perception: Dot-coms vs. Social Media Marketing
Ever since the buzz about the ‘coming tech bubble’ started – roughly speaking, sometime in the last month—I’ve noticed myself having this conversation a lot:
Some Guy: Where did you say you work again, man?
Me: I work at a locally well-known marketing and SEO company.
Some Guy: Oh, really! Wow, so that’s like a Dot-com, right?
Me: No. Actually it’s nothing like a Dot-com. We work for our clients in a close partnership. It’s not like we just host a bunch of advertisements on a site that has funny graphics of kittens or aliens.
Some Guy: Wow. If I were you, I would start my own company.
Me: Actually, it would be an act of insane hubris for me to start my own company and it would probably fail immediately unless I was extremely well-capitalized. We have an extremely complicated process that involves a lot of highly-specialized, seasoned people focusing on their mission-specific jobs. It’s taken us years to form business partnerships. And we still only get paid on a results-based system. You have no idea what it would take to go out and…
Some Guy: Yeah, but you should just go make your own company. You can be a millionaire! I wish I were in your industry! If I were in your industry I would be a millionaire!
At this point, I politely terminate the conversation or change the subject. I’ve had this conversation with two of the baristas at the café where I go for lunch. I’ve had this conversation with the guy who does landscaping for my landlord. I’ve had this conversation with tons of older folks from my father’s generation. They don’t get it. I work at a business that produces a reliable, scalable product by means of an extremely complex and refined process. It takes work. It takes elbow grease.
I’m guessing their perception is somehow connected to the buzz in the news lately: the Skype buyout, Groupon Now’s rollout and LinkedIn’s stock debut. All of which have happened in the last month.
Portents: LinkedIn’s Stock Debut & Big Skype Buyout
Thursday May 19th: LinkedIn’s stock debuted at twice its projected asking price. The company’s valuation shot up to $9 billion by day’s end, and shortly after the closing bell the blogosphere was abuzz with interpretations and predictions based on the day’s events.
A common sentiment appeared as the opening line in The Buffalo News: “There was an unmistakable echo of the Dot-com boom Thursday on Wall Street.”
The article goes on to recap the surge in LinkedIn’s stock prices over the course of the day. Issued at an asking price of $45, the price of shares jumped to $122 dollars before lunch and closed at about $95 dollars —better than 200% of the expected price tag – having sold 30 million shares.
Let’s see: 30m X 95 = $2.85 billion. That’s an impressive amount for anyone to rake up in one day. It’s the highest valuation for any internet company since Google’s 2004 debut. And let’s be frank: LinkedIn is no Google. The potential functionality and opportunities for monetization at LinkedIn—even at their outermost limits—do not approach anything like the revenue levels Google has achieved.
The company’s revenue for next year is projected to be a mere $500 million. These ratios, then, are admittedly tilted. Google trades at about 5 times their projected revenue. With a market value of $9 billion, LinkedIn is trading at 18 times their projected revenue. It’s going to be hard for their revenue to catch up with such an optimistic valuation, no matter how you slice it.
All of this happened just a few weeks after Microsoft bought Skype—a company that’s actually been running in the red—for $8 billion. Meanwhile Facebook is surging behind the scenes and Apple’s brand valuation grew by 81% last year. A cloud-based revolution is coming, we are told.
So it’s understandable that people are nervous about a bubble. And, indeed, I’ll venture an amateur forecast: whoever bought LinkedIn stock last on the 19th of May and is still holding onto all of their shares two years later is going to be experiencing some serious buyer’s remorse. I’ll bet you a round at happy hour, bottom dollar: LinkedIn’s valuation is not sustainable. Microsoft is going to have trouble making the money they spent on Skype back from Skype alone—although, depending on how they bake it into to their total brand package, I’ll bet their $8 billion gamble will pay handsomely in the end.
However, these two risky run-ups do not a bubble make.
I would argue that robust growth in the tech sector this year has not been a harbinger of another bubble anything like the one we saw pop in March 2000. To prove my case I’ll have to use anecdotal evidence. The main difference I find is that in the late 90’s the ‘Dot-coms’ did not actually produce any product or service.
Dot-coms relied on ad revenue projections. Their long-term performance—and even their short-term performance—were not measurable or quantifiable. They were not self-monitoring. In short, their business model and process had nothing whatsoever in common with the contemporary tech industry’s model and process. The only similarity is that ‘Dot-coms’ made use of the internet, and so do we.
And we’re going to keep doing what we do, growing in tandem with the recovering economy. So calm down, everyone.
[...] The guest post is written by @nwstein, an international marketing manager and consultant who moved to Vienna two years ago from London, where he worked predominately in the Sport and Entertainment field. This post is in reply to @thomasdoane‘s guest post “Next Tech Boom“. [...]