Monday, October 17, 2011
Will Facebook's IPO Mark The Beginning Of The End?
Dave Whorton is the founder of Tugboat Ventures, a Silicon Valley venture-capital firm.
Forbes - Remember when Netscape went public in 1995, kicking off a torrent of investment in new Internet companies that lasted for five years? Well, now we’re waiting for another Netscape-caliber IPO: the first public stock offering by Facebook, which is expected to come sometime next year. The deal will no doubt value the company at tens of billions of dollars, or more, and make many, many people into multi-millionaires, if not billionaires.
Except this IPO will spell the end of the party, not the beginning. I’m convinced that the frothiness we’re seeing right now in Silicon Valley cannot last. And it won’t last, I believe, past the point at which Facebook finally sells shares to the public.
Why? One would have to be blind, or have no friends in New York, London or Shanghai, to not realize that Silicon Valley is currently operating in a different reality. In Silicon Valley, office space is scarce, engineering graduates are commanding record salaries and homes are being purchased before the “For Sale” sign has even gone up. The number of startups formed in the last two years dwarfs the company formation pace of the late 1990s. And high-growth companies are receiving private financings at valuations – many over $1 billion – that could only have been achieved a decade ago by going public and beating Wall Street’s estimates over several years.,
But here’s the disconnect, which is obvious to everyone: We are in midst of the Great Recession, with 9% U.S. unemployment, European default risk, growth in China slowing and state governments on the brink of bankruptcy. Yet young technology companies with unproven management teams and business models are commanding nosebleed valuations. The most recent example is blogging startup Tumblr, which raised money valuing it, reportedly, at $800 million. This despite the fact that the company doesn’t have its business model figured out yet. Many of these investments are being justified by the anticipation of some highly lucrative, initial-public offerings for tech companies in the coming 12 months. If standouts like Facebook, Zynga, Groupon and Twitter are going to go public for tens of billions of dollars, the argument goes, surely lesser tech stars can command a premium in their financings as well.
Some would argue that this investment frenzy is not irrational. The explosion of smartphones, social media and location-based services could fundamentally transform not only Silicon Valley industries but many others. I couldn’t agree more with Netscape founder Marc Andreessen’s “software will eat the world” argument, having invested under that premise since I was an associate at Kleiner, Perkins Caufield & Byers in the late 1990s and helped KP back companies including Google, Autotrader, BlueNile, Drugstore.com and Good Technology. Those firms have transformed industries and created billions in value for investors along the way. But transforming industries takes time, and often the disrupter gets disrupted again by a new entrant – or the incumbent proves to be more deft at responding than it was in prior years. For every business that has become a long-term market leader like Amazon.com, there are a hundred companies of significant potential that simply don’t make it. More