Tekedia Intelligence has looked at many data and we can conclude one simple thing – the tech bubble is near. We estimate that it will happen within the next five years. We have extended the date from 2014 because investors few months ago were putting money in winners, avoiding 2nd tier companies. But our recent research, especially the numbers we see in SecondMarket has convinced us that the bubble is near. They will jack up the valuations to the late 1990s rates and by 2015, we will have a tech bubble. Simply, now is the time to examine your business model and get your Plan B ready.
Typically, bubbles are bad for the investors and companies, but over time, it enables a new phase of technology adoption.When bubble happens, prices of tech gadgets drop, making them affordable for people that would not have afforded them few months before. So, as more people use those technologies, they quickly rebuild the sector or industry. So, bubbles are not necessarily that bad. Without tech bubbles, many cannot afford most gizmos as nothing will bring down the prices.
That said, you must not allow your company to become the victim of the bubble. You need to plan and execute to mitigate any potential impact it will have. We are certain that a bubble is on the way. The numbers do not lie:
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- LinkedIn had a 2010 revenue of about $243m but closed on its IPO date at $8.9 billion
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Yandex was $440m but ended with $12.5 billion
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Pandora was $138m but ended with $2.8 billion
By historical standards and date available to Tekedia, we see these numbers as very outrageous. Recall that eBay had $5.7m revenue in 1997 and ended on IPO day in 1998 at $1.9billion. Yahoo was moderate because it was too far from the late 1990s bubble; it had a revenue of $1.4m in 1995 and raised $848 million on the IPO first day.
While the numbers above do not show good judgement on the value of the stocks with the earning power, open an account in Second Market and see the valuations on Facebook, Zynga and Groupon. Facebook generates about $2b and is worth excess of $80b (You can pick Facebook over Amazon or Cisco as they are largely the same value now. It is already bigger than Boeing and other iconic firms); Groupon, the commerce site and heavy cash burner is a $713m revenue firm and worth $20b. Zynga ends the top flights at $597m and valued at about $20b for making FarmVille, CityVille, Coffee-Ville, etc. Twitter is worth $8b in SecondMarket, a secondary market. The valuations in SharePost for these companies are not different.
These evaluations do not depict reality. You can also see that these numbers are pushing real estate high in the Silicon Valley environs. We think for the investors to overlook that LinkedIn is trading at 750 times its next year’s earning is wrong. S&P and Dow valuations average around 12x of the forward earnings.
LivingSocial is certain to go public soon. It was a mixed one for Chinese Youku which is expected to become what Youtube is to the English world in China. It reached $70 before it came down to $25. But our biggest sign of bubble is color.com that received $41m to make an app for photo sharing. We think the domain value is more valuable than the product. Investors are discounting risk and valuing companies with reckless abandon.
Recall that Bebo was bought for nearly a billion dollars (more than $800m) but got dis-invested at few million dollars ($10m?). Myspace is a case in point; News Corp bought it for $580m in 2005 but sold it for $35m few weeks ago.
Do not be deceived thinking that a bubble in Silicon Valley will not affect you in Nigeria or Kenya. No. It will because most of the services we use now are cloud-based and any bubble could take those companies away with your data. So watch carefully as these changes unfold. Tekedia will be giving updates.