AGILEVC My idle thoughts on tech startups

March 3, 2011

I thought I’d revisit my “Boom or Bust: The Boom Case” post from November 2010.  In a nutshell, I predicted that some of the category defining internet & digital media companies (Groupon, Facebook, LinkedIn, Zynga, Twitter) would have blockbuster exits in the near future.  I posited that in turn would bolster IPO and M&A opportunities for a whole range of other late stage startups.  It’s been just over three months since I wrote that, but the boom case has gained meaningful weight in that time.   

  1. Just over a week after that post, the $6 billion dollar Google-Groupon acquisition deal leaked out.  That ultimately wasn’t consummated as we all know, but Groupon then immediately completed a financing of “like $1 billion” and has reportedly talked with bankers about a possible IPO in late 2011.
  2. Facebook completed a $1.5B large-scale private placement by Goldman Sachs at a $50B valuation (a “quasi-IPO” in my book), and intimated it may go public in early 2012.
  3. LinkedIn filed it’s S-1 on January 27 (my standard full disclosure – I was part of LinkedIn’s founding team & remain a shareholder).
  4. Twitter closed a 9 figure funding round at a 10 figure valuation in December and Zynga appears to be doing something similar here in Q1.
  5. Demand Media successfully completed it’s IPO on January 26 and today has a market capitalization of nearly $2B (a/o 3/1/11).
  6. Pandora filed it’s S-1 on February 11th.
  7. Privately, I know of at least a half dozen other late stage startups in this sector that have the laid the groundwork to start an IPO process here in the first half of 2011.
  8. We haven’t seen any $1B+ acquisitions yet, but there have already been some in the hundreds of millions barely 8 weeks into the new year (e.g. AOL – HuffPo).
  9. The pace of VC financings done at $100M+ valuations hasn’t slowed, if anything it’s picked up slightly.  Just a couple recent examples include SCVNGR (reportedly $150M post-money), Square (well over $200M post-money), and Living Social (Amazon strategic round reportedly at ~$1B). 

But couldn’t robust IPO, M&A, and VC financing markets be the hallmark of either a boom or a bubble? Certainly.  We can debate the merits of any one company’s valuation, whether it be in the private or public markets.  We can also debate the merits of various parts of the startup investing value chain buying and selling equity stakes from each other.  But to those who in 2010 suggested that this was all the beginnings of “Bubble 2.0″ (or who continue to assert that today), let’s look at the facts.

For this to be a bubble, most or all of these companies would have to be massively unprofitable businesses struggling to figure out a revenue model.  Unfortunately we only have definitive information for companies like LinkedIn, Demand Media, and Pandora who have made public SEC disclosures.  But between those and unofficial numbers out in the public domain, we can at least develop a composite picture of the sector. 

  • Facebook did close to $1B in revenue in 2009 and probably did ~$2B in 2010
  • LinkedIn did $161M in revenue in the first 9mo of 2010 and is on a run rate of approximately $250M (3Q 2010 annualized)
  • Groupon is doing well in excess of $1B in gross revenue (perhaps $2B+), which translates to hundreds of millions in net revenue
  • Huffington post is doing $60M+ in revenue, given AOL paid ~5x revenue
  • The Web 2.0 leaders appear to have comparable if not faster revenue ramps to blockbusters of prior eras like Google, eBay, Yahoo, and Amazon 

Again, reasonable people can and do debate what any one of these businesses should be worth.  But clearly these are all real businesses, not vaporware.  In addition to a strong top line, most are profitable on a GAAP basis or are profitable but for capex to fuel growth or non-cash expenses like stock compensation.  Given they’re still growing extremely rapidly, often have very high gross margins (though not always), and many are creating new product & service categories a reasonable person could certainly conclude that many of these valuation are appropriate.

I for one see an exciting 2011 for internet & digital media companies, and not just the late stage ones in transition towards public markets or potential large scale acquisitions.  The evidence seems to be strongly with the boom case.  Anyone care to differ?