A while back I wondered aloud whether or not we were in a bubble, and, more importantly, whether it really mattered
? My point was that given the dynamics of the Web 2.0 world, where the exit for start-ups was an M&A event from one of the many cash rich public companies, was there any down-side to (perhaps) excessive valuations? Specifically, I wondered what, other than terrorists or a down-quarter from Google, could cause this "bubble" to pop?
It seems in only a few short weeks, times have changed. Not that the bubble has burst, but rather it looks like the model is changing. Today I read this entry on Valleywag about everyone's favorite Web 2.0 darling, Facebook, and how they think they are worth $10 billion. Now, Facebook is a great company, doing some amazing things in attracting and keeping users in the hyper-competitive world of social networking. But $10 billion??
If I had to guess, I would say that from a revenue perspective Facebook probably does $.30 CPM sitewide. So, let's say they do 5 billion pageviews each month, that translates into $1.5m in revenue each month, or $18m annually. Not bad right. But to get to a $10 billion enterprise valuation, your now talking about 100x revenue. Hmmm....
OK? So they have an unfounded valuation - so what? Well, I'm thinking that given Facebook's high profile, how their story ends may markedly effect the others in this valley, and, unfortunately for the We b 2.0 crowd, not positively. Given all the hype, bluster, press, etc. around Facebook and their success in growing an audience, they're the new poster child for the Web 2.0 world. There have been previous poster children - MySpace, Flickr, YouTube, Topix?, etc. - but they've all been purchased. Once you get bought you stop being the poster child and you become part of the organization. And more importantly, once you get bought your valuation stops being questioned - you're worth exactly what you sold for.
Unfortunately for a lot of companies in this valley, it doesn't look like Facebook is following that model. When you spout off numbers like $10 billion, with no revenue to justify it, you price yourself out of the M&A world. Accordingly, if they ever do choose to sell to someone (if that's even possible now), it's going to be for a lot less than that. Alternatively, if they go IPO, absent a huge change in their revenue outlook, the discipline of the public markets is likewise going to bring their valuation back down to earth (remember, it was the discipline of the public markets which helped normalize (i.e. pop) the last bubble).
The moral of the story being that both of these options indicate the company's not worth what they say/ want it to be worth. So if that's the case with the Web 2.0 poster child, what does that say about the rest of the Valley wannabe's???
In other words, rather than Google, maybe Facebook is the company to watch as the bell-weather of the Web 2.0 economy. How this story ends exactly, I'm not sure, but given the expensive corner Facebook seems to be painting themselves into, if I'm with any other Web 2.0 start-up, I certainly would hope they figure it out later, rather than sooner.