The soaring valuations of Facebook, Twitter and Groupon reflect the formation of a new Internet bubble that could be even bigger than the first one. While a few big companies with scale and momentum have grabbed all the headlines, they are hardly anomalies. Dozens of early-stage Internet and tech companies are soaring in value, as venture capitalists rush to get a piece of the action.
Consider the rapid rise of GroupMe, a free group texting service that was formed in April 2010. It ambled out of the nest with a valuation somewhere below $5 million. Just a few months later, the New York based company raised $9 million and locked in a valuation of $35 million. Hashable, which allows users to make introductions via Twitter and otherwise keep track of their contacts with other people, raised $4 million from Union Square Ventures in a deal that values it at $25 million to $30 million. The funding occurred in November, just a few months after the company — which, like GroupMe, is based in the emerging venture hub of New York-- was out of beta.
“There is a bubble in the price of venture- backed companies. The valuation of many good companies is too high, and a lot of mediocre companies that would have had trouble raising money in the past are getting funded now,” says Jay Levy, partner and co-founder of New York-based venture capital firm Zelkova Ventures.
Not everyone is alarmed. Mashable co-editor Ben Parr told Silicon Republic that this investment phase is different than the bubble of the ‘90s, because Facebook, Groupon, gaming company Zynga and others have viable business models and are making money. Members of the public also are more willing to use Internet services than they were before.
“Do I think there will be a day of reckoning? No, I don’t. Will there be a time where some of these valuations will go down? Probably, there’s always a cyclical cycle when you talk about markets,” Parr told Silicon Republic.
Levy argues that Internet Bubble 2.0 has formed, and that it won’t last forever. “I think we are nine to 16 months away from a shakeout,” he warns. The turning point, he says, will occur as early-stage companies that raised angle capital and have valuations in the low single digit millions try to raise follow-on capital — and fail. Those companies will have a tough time surviving, and their fate will discourage early-stage investors from being so loose with their cash. And so, the market will turn.
What about the fate of big Internet companies such as Facebook, which has been valued at up to $75 billion in the private market, or Twitter, which has a valuation of $7.7 billion, or Groupon, which is valued at $6 billion?
Levy says his major concern is what happens to investors if these companies go public. The new Internet bubble is a self-contained problem right now, because the companies are privately held. If they go south, they can’t bring down the financial markets and the economy, the way the tech and Internet companies of the ‘90s did.
“What concerns me,” Levy says, “is what happens if the financial markets open up to these companies and they are able to IPO.” At that point, their health would be tied closely to that of the capital markets and a wide range of investors, from institutions to individuals.
