In LinkedIn IPO, Hints Of Another Tech Bubble?
When the career-focused social networking site LinkedIn sold shares to the public and managed to more than double its share price and reach a market value of nearly $9 billion last week, many people thought: bubble.
The last time the market showed that kind of enthusiasm for a company with relatively small profits was more than a decade ago. Back in early 2000, the Nasdaq Composite Index was climbing toward 5,000. Investors poured big money into almost any new business plan with a dot-com in its name, and startups spent millions of dollars buying ad time during the Super Bowl. Remember Pets.com's sock puppet?
The heyday ended abruptly in March 2000. Investors pulled their money and retrenched. The focus returned, once again, to profits. And everyone learned their lesson. Or did they?
"We have a lot of echoes of 1999," says Lee Simmons, an industry specialist at Hoover's, a company that tracks IPOs. Simmons isn't ready to declare a bubble, but he also thinks LinkedIn's profits of $15.4 million last year don't make it worth $9 billion. Also, the company faces risks — most notably that its average user doesn't visit the site very often.
On the other hand, Simmons says the company has been around for eight years, it is profitable and — regardless — some people just love bubbles.
"Bubbles are fun, you know?" he says. "They're round, they don't hurt when you run into them, at least initially, and they get bigger and bigger."
Venture capitalists are among those willing to fan the hot air — especially when it comes to social networking, Simmons says. Speculation is that Facebook, Groupon and Twitter are all considering their own public offerings. It's the first opportunity in a long time — about a decade — that early tech investors have a chance to sell the idea that technology is transforming society, and that it can make serious money.
"I guarantee you there is not a single VC backer in this country who isn't thinking about going to market as quickly as possible," Simmons says. "These guys want to start making money again."
Michael Aronson is a venture capitalist who is, indeed, excited about making money again.
Aronson got his chance to sell late last year. Diapers.com, which his firm funded, sold to Amazon for $545 million. He was pleased with that sum until he saw LinkedIn's showing last week.
"Diapers.com was on the path to IPO," Aronson says. "And right now I wish they'd stayed on that path because the valuation would have been significantly higher."
Aronson, who taught at Wharton School of Business during the last tech boom, says there are significant differences between then and now.
Now, companies can do much more without having tons of capital. Web access, computers, servers and other basic infrastructure are much cheaper. Also, startups aren't throwing money at Super Bowl ads like they used to.
Plus, companies such as LinkedIn have been around for a few years — long enough to have a proven track record and some profits.
"The companies going public now are fairly large companies, with real users, real customers, real revenues, multiple revenue sources," Aronson says.
Anyway, Aronson says, it's wrong to think that just because some of those businesses didn't work in the 1990s, they won't work now. Back then, many people accessed the Web through clunky dial-up connections. Phones didn't come with high-speed data plans, so online shopping wasn't what it is now.
It's funny, Aronson says — just the other day he reviewed a couple of business plans proposing to sell, of all things, pet food online.