Is there a tech bubble or should we be popping the cork with bubbly to celebrate the resurgence of tech valuations, IPOs, M&A and start-up activity? Mark Silva leads a panel of today's top VCs to discuss their take on the subject and how they're addressing and evaluating in a high-growth capital environment.
Speakers: Jason Calacanis (Open Angel Forum), Guy Kawasaki (Garage Ventures), Tony Conrad ( True Ventures), Kent Goldman (First Round Capital), Charles Hudson (SoftTech VC), Lou Kerner (Wedbush Securities) and moderated by Mark Silva
COMMENTARY: If you've been following my blog posts you know my position regarding today's valuations of startups like Facebook, Groupon and Twitter. Warren Buffet (see my previous blog post), one of the greatest investor's ever, calls Groupon and Twitter's valuations "mathematically insane", so I hope you see where I am going with this.
These panelists, are all respected VC's and the majority are saying that there's "No Bubble", or have characterized the current tech startup market as "foamy, frothy and a few bubbles". It's true that most of the money being invested into today's tech startups is from VC's and wealthy investors, but the idea that nobody else will be hurt if there is a bubble is incorrect.
- Thousands of employees working at these startups have been compensated in stock of these startups, and this is one of the reasons that they remain dedicated and loyal to the company. If a tech bubble hits, their equity is going to be wiped out.
- Investor's and employees in other tech sector's are going to feel the bubble shockwave as well.
My main gripe has been with startups, primarily the social networks, that depend on an ad-supported revenue model. I am of the opinion, and have been for at least two years, that it is too early to give ad-supported revenue model total validation.
- To date, there has been no real stampede of small businesses, big brands and ad agencies comitting themselves to big social media ad buys.
- Social media represents a very small sliver of the total media pie.
- Many advertiser's or agencies simply do not understand social media, including what metrics use, how to measure ad effectiveness and ROIs.
I was really shocked when I heard that Twitter was charging $100,000 per promoted tweet. Facebook and Twitter both have had to reduce their minimum ad buy.
I also believe that the ad-supported revenue money of social networks has reached a critical inflection point, where the number of users is a finite number, growth in users and ad revenues will enter a slowdown phase and both users and ad revenues will eventually peak. In short, the ad-supported revenue model, for lack of a better word is just too fragile and way over-hyped and oversold.
There are more failures that there are big successes among social media advertisers. One of the problems is that social media is not an efficient advertising platform. According to WebTrends, and others social media experts, the research clearly shows going back to the time Facebook first started selling ads, that clickthrough rates are abysmal, even lower than search. Another hint of this inefficiency are revenues per user. Facebook and Twitter are at the bottom of revenues per user by wide margin. It takes humongous scale in users to generate significant revenues.
I didn't expect any of these VC's to go out and boldly admit that we are in the midst of a potential bubble. Most of the VC's came close, characterizing the present situation as "frothy" or "foamy". The problem is determining at what point that froth turns into a full-fledged boil and this triggers a bubble.
Tony Conrad of True Ventures believes that we are "definitely in a bubble", but a different kind of bubble than the Dotcom bubble of 1999/2000. He also says tech startup valuations are based on future potential "straight across the board", which is the same thing I have been saying.
Guy Kawasaki, Garage Ventures made a valent point, expressing concerns over some of today's valuations, blaming the VC model for creating this kind of bubble because they are playing with somebody (LP's) elses money, and don't have to worry about risk.
Lou Kerner, a stock analyst at WedBush Securities, believes in financial analysis including discounting future earnings, but he said "no bubble". He believes that some of the prices paid for shares in the secondary markets for private companys are way under-valued, because startups like Facebook and Twitter would be worth more in a public market.
Jason Calacanis from Open Angel Forum is not satisifed with the level of risk. He's wants to bet the house, take on even more risk. He believes this is the beginning of a new era. Today's technology startups are the future, and they are going to turnaround America and create a lot of jobs. Bullshit, tech companies outsource most of their manufacturing overseas, creating mostly white colar jobs at home. Social network don't create a lot of jobs either. He pulled a "Charlie Sheen", claiming that Facebook could be worth $1,200 to $1,500 in an IPO. Definitely not #winning.
I honestly believe that social media sites are better suited as "facilitators" for brand-to-fan engagement. Social media sites are at their best for communicating news and information and listening to their customers. Some social media experts refer to Facebook, as the "world's largest focus group", which is an excellent analogy.
Another false premise is that fans make friends with a brand, when in actuality a brand is not a person. Social media site users make friends with other people with similar interests, not brands. Brands should not go to Facebook or Twitter with the idea of building their brand. You should already be branded before you come to a Facebook or Twitter. Social media sites are the caboose, or end of the media channel funnel. That's where you solidify and strengthen your relationship with your brand fan base to keep them happy and loyal.
In summary, it was very enjoyable to listen to these VC's, but I harken back to what Warren Buffet said about Groupon and Twitter valuations, and when Warren talks, people listen.
Courtesy of SXSW Panel YouTube video titled " Bubble or Bubbly?"
Comments