Internet Boom or Bust: Part II?

May 11, 2011
George Anderson

Those who went through the late nineties and early 2000’s
remember how quickly internet companies attracted investment and then promptly
went belly-up. The valuations seemed to stretch common sense and yet investors
(individual and institutional) would throw money after these firms looking
to hit on the promise that they would remake the world as we knew it. The retailing
segment had plenty, with online grocery firm Webvan perhaps the most prominent
of those that didn’t
make it.

Today, it seems, we may be back in a similar place even if not quite
so frenzied as it was 10 – 15 years ago. Companies such as Gilt, Groupon and
LivingSocial are attracting large investments, leading some to question the
businesses’ actual worth.

A report by Reuters last month projected that
Groupon could raise up to $1 billion in its initial public offering. The company
could attain a valuation of up to $20 billion.

Recent reports that Gilt had
received $138 million in investment capital, bringing its valuation to $1 billion,
led The Wall Street Journal to question whether the flash sales retailer was
worth it.

"I’m a bit of a doubter," Andrew Jassin, co-founder of Jassin Consulting
Group, with clients that supply Gilt Group, told the Journal.

Mr. Jassin’s
doubts stem from questions of supply for Gilt. As a flash sales site, how does
it guarantee that it has consistent inventory to keep up with demand?

Discussion Question: Are you concerned that we’re heading for another internet bust similar to a decade ago? Of the current crop of hot companies, which do you see as being most worthy of large investments?

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8 Comments on "Internet Boom or Bust: Part II?"

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Paula Rosenblum
10 years 6 days ago

I think there will be more big winners than there were in the Internet bubble, but there will be a lot of losers too.

Investors are always looking for the next big thing. The internet, real estate, RFID, and now social media, deal sites, and mobility. BUT, winners there will indeed be.

Warren Thayer
10 years 6 days ago

Smart money learned from the dot-‘con’ bust. But there’s a lot of stupid money out there, that goes after some of these new ventures like a heat-seeking missile. The most basic business and ROI measures are often ignored because “this is an investment in the future.” I heard that last time around, too. There’s still opportunity to be found, but a lot of these ventures haven’t been able to turn even vaguely decent profits, yet they still have lots of sex appeal in the investor market. Go figure.

Dan Frechtling
10 years 6 days ago

We are in a social internet bubble. Even the profitable companies are overvalued. To quote Alistair Fairweather, is Groupon at $25B worth as much as Hyundai? Is Facebook at $50B worth $15B more than Disney?

Valuations of consumer businesses are often driven by perceptions of adoption. These services have mass appeal, so the risks appear lower.

A smaller group of investors are at risk, but a burst may still hurt. Average individuals won’t get burned like they did in 2000, but tomorrow’s new venture won’t get funded if VCs and angels lose money today.

Another bubble to consider is trending behavior (aka fads). Could Facebook become MySpace? Or Twitter Geocities? Or Groupon’s model ’90s loyalty programs?

Changes in multiples threaten valuations, changes in behavior threaten revenues.

Bill Bittner
Bill Bittner
10 years 6 days ago
I too am leery of some of the valuations we are seeing for the IPOs of some of these Internet companies. I think some of the established companies such as Amazon have shown themselves to be as effective with logistics as they are with technology. For those who deal solely in the virtual world of search, gaming, video, and music distribution, it is becoming more difficult to differentiate. Even Google has gone far beyond its fundamental search service to offer browsers, mobile operating systems, and cloud based office applications among other things. Entrepreneurship 101 teaches about “barriers to entry.” High school students are able to write “apps” for cell phones. Cloud computing puts massive amounts of fully redundant computing power into the hands of boutique software developers. The “Facebook Phenomena” is not so much an example of technical genius as it is a case of being in the right place at the right time. Marketing on college campuses and snob appeal (remember MySpace?) were as important to Facebook as “The Wall.” As more and more… Read more »
Jonathan Marek
10 years 6 days ago

Sure, we’ll see a social bust, but that doesn’t mean there won’t be winners. Look at Google’s emergence from the first bust. The key is to find a scalable, valuable-to-customers, and highly profitable model. In the first bust, too many companies worried too much about scalability and not enough about profitability.

Ed Dennis
Ed Dennis
10 years 6 days ago

I was in the middle of the boom and the bust. The boom was based on potential and the bust was based on unrealized potential. Most of the internet companies now have somewhat mature business models. Amazon, Google, etc., have revenue streams. This wasn’t the case the first time around. Back then, no one had a PE, just an idea! I can assure you, great ideas are a dime a dozen, so let your common sense be your guide.

Peter Leech
Peter Leech
10 years 6 days ago
While I am also concerned about the valuation of a couple of players, the high valuation hasn’t really expanded. The Microsoft/Skype deal was another big play, but I actually believe that Skype is worth that amount to the Microsoft business. Of course, this depends on what they do with the product and how it can be infused into current toolset to augment overall consumer value. Separately, the revenue generation from Facebook hasn’t even begun. They are just playing around the edges. Watch Facebook Social Deals closely. It’s still their game to lose. Our 2011 Social Commerce Study with and comScore, Inc. will be published later this month. I can tell you that this consumer study indicates that consumers are actively using social for shopping…that’s real revenue potential. And if the trends we see continue, it looks massive. BTW…This bubble hasn’t even started. We’ve not seen the crazy IPOs at any scale. Watch for the IPO without any profits (or revenue) to become basic news, then get your needle out because that bubble’s gonna burst.
Ralph Jacobson
10 years 6 days ago

What is happening now is not even comparable to the original boom. Starting around 1998, when I was working with M&A consultants, I would receive “business plans” from start-ups almost daily asking for investment funding. Most of these “business plans” were nothing more than one or at most two pages with the last third of the document detailing the management’s exit strategy. As if you just had to ask for money and retire on it. No revenue model. Nothing. And the best part was that the banks would actually lay down and hand over the money to them.

We are nowhere near that situation today. Investments go through far more due diligence to get that level of commitment.


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