On a plane flight this week-end I was reading through a litany of tech news and came across the latest example of the frothy start-up valuation bonanza: Zynga is supposedly raising capital on a $6B+ valuation. I fired off a few notes to friends with the Subject Line: WTF!
Those of us front and center to the “.com bust” in the late 1990s recall the same mumbo jumbo about how valuations for Internet companies were subject to different metrics than the old world investments. Blah blah blah. Bust!
Today I came across a Slate post by Annie Lowrey titled “The Social Media Bubble” in which she does a nice job dissecting why the current hubris may not be as problematic as it seems. First, and perhaps most importantly, the scope of investors playing in the heady market that includes the likes of Zynga, LinkedIn, Facebook and Foursquare is small and mostly limited to “professional investors.” If these properties fail to deliver adequate returns at these stratospheric valuations, few outside this elite crowd will experience any deleterious effect. In other words, if they want to play the buy high and pray game, more power to them.
If, on the other hand, these valuations turn out to create a new normal for high traffic social media/Internet properties, then all the better for those in the space. As Ms. Lowrey insinuates in her post, perhaps we should be delighted in a boom, even though we carry a healthy dose of skepticism born from a remembrance of history.