Is social media running on hype?

Social media companies are getting astronomical valuations – but are we headed towards a bubble and a bust like the 90s?

e4m by Gopal Sathe
Updated: Jun 9, 2011 9:41 AM
Is social media running on hype?

Is social media headed for a bubble and a bust, similar to what we’ve seen before in the 90s? Or has that experience taught people the necessary truths about making online work? Some recent valuations might be hard to understand, but an air of paranoia is certainly not justified. There have been a lot of very high valuations lately, but this has gone towards proven companies, which have a working revenue model in place.

Alok Mittal, Managing Director, Canaan India, has advised Canaan Partners in their investment in Bharat Matrimony, iYogi, Cellcast, UnitedLex, Chakpak and MotorExchange. Speaking to exchange4media, Mittal said, “I do not fully subscribe to the view that there is an evident bubble around all these companies. Some companies like Facebook are redefining how the web functions and are increasingly defining how they will extract significant value from being the social infrastructure of the internet.”

For companies like Facebook, LinkedIn and Twitter, the last few years have been marked with unchecked growth and also tremendous funding. Is any of this a cause for concern?

Consider the numbers

Skype is founded in 2002. Acquired in 2005 by eBay for 2.6 billion, around 350 times the revenue it was generating at the time. In 2007, eBay writes down the value by 1.4 billion, and sells 70 per cent of their stake in 2009. In 2011, Microsoft buys Skype for 8.5 billion, an estimated 10 times their annual revenue of 860 million [WSJ].

Delicious is founded in 2003. In 2005, Yahoo acquires Delicious for an estimated 15-30 million. Yahoo also is unable to monetize Delicious and in 2010 announces that they will sunset the property. In 2011, former YouTube founders Chad Hurley and Steve Chen buy Delicious for an estimated 1 million [Gaurdian].

Facebook is founded in 2004. In 2006, Facebook turned down a 1 billion buyout from Yahoo at a time when their estimated revenues were less than 100 million. In 2007, Microsoft gets a 1.6 per cent stake of Facebook for 240 million. This means a total valuation of 15 billion. In 2010 the company reaches revenues of 2 billion [Bloomberg]. Analysts say the company’s worth in 2012 will be 100 billion [WSJ], compared to an annual revenue of 2 billion.

LinkedIn is founded in 2003. Sequoia Capital invests 4.7 million in Series A funding. In 2004, Greylock invests 10 million in Series B funding. In 2007, LinkedIn raises 12.8 million in Series C funding from Bessemer. In 2008, LinkedIn raised series D and E funding from Bain Capital and a conglomerate of Goldman Sachs, Bessemer, McGraw-Hill, and SAP Ventures, of 53 million and 22.7 million. The company is valued at 1 billion [GigaOm network]. Recently, LinkedIn goes public and the IPO raises the valuation to 9 billion (vs a target of 3 billion), with annual revenue of 200 million.

Twitter is founded in 2006. In 2010, revenues are at around 45 million, but a valuation is made of 3.7 billion. In 2011, the company was valued at 7.7 billion with revenues of around 150 million [WSJ].

GroupOn is founded in 2008, and raises 4.8 million in Series A funding before the launch. 2009 sees Series B funding of another 30 million. Series C funding in 2010 raises 135 million and pegs the value of the company at 1.3 billion [Mashable]. Groupon’s revenue hits 760 million, and according to reports in Wall Street Journal and Bloomberg, based on insider sources, the company turns down a 6 billion buyout offer from Google. In 2011, GroupOn raises Series D funding, of 950 million, and according to WSJ is preparing for an IPO of 25 billion.

Based on success

Vivek Bhargava, CEO, Communicate 2, is also of the opinion that while these companies are being valued at a lot more than their revenue, it is justified. He said, “It’s not jus about the revenue that they are earning, but also the potential that they bring. Take the Skype example. Their revenue might be a fraction of the value, but if that wasn’t the case, then they wouldn’t be selling. However, for Microsoft, the deal will be about more than the Skype users and those revenues. This will be a way to bring on board their technology, and integrate it – imagine doing a video conference with a Powerpoint presentation built in, and calling up an Excel sheet to demonstrate your point. So the potential value becomes much higher.”

“Today it’s not enough to have an idea either, unlike the dot-com boom. The companies which are getting funding are the ones which are able to prove their value, and show that they can provide a real return on investment to funders. Companies like Facebook and LinkedIn are still figuring out ways to maximize revenue, but their numbers are already quite impressive,” he added.

However, Romi Mahajan, Worldwide Director, Digital Marketing and Search, Microsoft, sounded a note of caution. He said, “All ideas in business go from conceptual to operational to institutional. Social media, four years ago, was conceptual – it’s right on the border now of institutional. As such, it should no longer be thought of as a new panacea to problems of marketing. I am aghast that so many marketing campaigns resolve to a company’s Facebook page and not the core website. I believe there will be a real period of blowback when the hype created by social media is not met with appropriately tectonic results.”

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