Internet Bubble 2.0: Some Valuations Still Tethered to Reality

Even as the valuations of Internet companies soar in the private market, there are still a handful of digital startups that have yet to be entirely swept up by the momentum.


Even as the valuations of Internet companies such as Facebook, Twitter and Groupon soar in the private market, there are still a handful of digital startups that have yet to be entirely swept up by the momentum.

The valuation of the big Internet companies is very high, even by the standards of the tech sector. Google, which went public in 2004 with a valuation of 23 times trailing revenue, is today valued at $190 billion. But it has $29 billion in profits. Facebook, by way of comparison, has a valuation of as much as $75 billion in the private market, which is about 37.5 times estimated trailing revenue. Groupon, which had an estimated $769 million in revenue last year, is valued at as much as $25 billion.

Yet there are a few Internet companies with relatively modest multiples. That doesn’t necessarily mean that they will pan out over the long-term as successful businesses, or IPOs, or investments. But they can be examined through a somewhat different lens. If these companies to continue to evolve as successful businesses, then the entry point for investors might be more advantageous than it is for other Internet companies with sky-high valuations.

Zynga, which develops games for social networks such as Facebook, has by some accounts grown faster than any other Internet company in history. Founded just four years ago in San Francisco, it had $850 million in revenue in 2010. It was launched by CEO Mark Pincus and five other founders, working with $29 million in capital from Kleiner Perkins and other venture firms. Pincus had founded several other companies including online community Tribe Networks and tech support company SupportSoft. Last year, he downplayed the odds of an IPO, although the company has now shifted toward a “no-comment” on the subject.

Revenue per Zynga user is relatively high. It has 72 million users, less than one sixth the size of Facebook. Yet it has nearly half as much revenue.


Yet Zynga’s valuation is estimated to be in the $10 billion range, according to the Wall Street Journal. That is a far lower valuation than Facebook, despite the fact that its business model may be even more efficient from an economic perspective. It is hard to say how much that valuation will rise before it goes public, an event that is expected sometime in the 2012 time frame.

Zynga isn’t a perfect IPO story. It has been linked to all sorts of spamming controversies, and some gaming fans are less than thrilled with its work or its business model, which compels users to buy virtual objects. But if Zynga’s multiples remain in the current range, it might offer investors some value come the IPO.

LinkedIn, the eight year old social networking site for professionals, is inching toward an IPO, too. Founded by PayPal veteran Reid Hoffman, the company is now run by CEO Jeff Weiner, a former Yahoo executive. While other Internet companies have seemingly tried to keep an IPO at bay, Weiner has talked openly about how going public would help the company grow by creating a currency for acquisitions .

The company has none of the buzz surrounding other Internet startups. But with 100 million users and $243 million in revenue in 2010, the company certainly isn’t part of the hype machine, either. Its value -- estimated by the Journal to be in the $2 billion range -- is a relatively modest eight times trailing revenue.

The big criticism of LinkedIn is that user engagement is low. Many members access the site through email, and don’t even bother visting the web site on any regular basis. Yet the company doubled revenue in 2010, and the pace of growth actually increased toward the end of the year, according to the Journal.

The revenue tends to come from premium subscriptions and other fee-based services that complement the free basic site. That means that LinkedIn is relatively free from the volatile swings of the advertising market.

LinkedIn faces plenty of challenges when it comes to user engagement. But there are plenty of now-forgotten Internet startups that would have killed for its revenue. It’s a real business. It isn’t free of risk, but given its growth rate -- and a successful entry into markets outside the U.S. -- the surprises may be on the upside.