Wednesday, 11 April 2012

A billion or a bubble.

The Instagram facebook acquisition for 1 billion usd, has a lot of people scratching their heads. 

Firstly, because the valuation last week seemed to be 500m dollars when the company raised 50m just before the acquisition, in the most bizarre piece of timing. But for a reason, be sure, as yet unknown.

So the valuation this week of 1 billion seems to have doubled real quick and as I think, most are saying excessively. Mind you, we said the same about the youtube acquisition then too.

Secondly, there is a view afoot that the main "hole" (albeit a small one) in the facebook ipo is China. As you know facebook is banned in China (as is Twitter and Youtube and 250 others) but interestingly Instagram isn't and anyone who has been to any tourist attraction, will know cameras and photography are big in China. Huge. As is Instagram consequently.

So this purchase might be about getting access to the big Chinese market. Big as in the biggest Social Media marketplace (500 million chinese are online through their own networks). And it's also a big market that's opening up in the traditional advertising and economic sense. It's where growth is.

Thirdly too, IPO investors more and more are themselves Chinese, so they're less likely to be active about buying Facebook shares at IPO because they don't know the brand very well. In fact few will ever have used it.

With Instagram, which they do know, they might be attracted in.

However, I personally also think that behind this purchase is just common sense. Facebook is about picture sharing and instagram is about the best there is in the space. It makes sense. 

(Interesting times too for the folks down at Pinterest, having now overtaken Linkedin as the third social media site and being picture based.)

However regarding instagram, what doesn't make sense is the manner and the price paid. The fact that it's a nice round sum of a "billion" (with the cash drain reduced by offering stock) sounds to be very like this was a competitive offer. 

It looks to me that there was probably another player and probably linked to the VCs who gave instagram 50m last week. It just seems to me to be a typical "here's our last offer, take it or leave it" of a "billion" all-in. I do think the valuation (and bidding) actually started at 500m but was forced up by two competitors. A little conjecture but I'll bet. 

What's worrying me, as someone who was here at the first dot com bubble, is the rising valuations for small companies with low employees, short track records and little revenue. And a sort of a "here's a billion, take it or leave it" is so reminiscent of everything from those days including Aol/Time warner

There's too much money about. I note too from plenty of forums, that there's a lot of VC fund-raising going on and again, this sort of 'war chest building' will further raise values and is so typical of bubble-building. If sellers know you have more money, they'll want it and valuations rocket. 

These valuations, notably over the last 4 months are getting scarily like before. And I feel like I know because I was part of the first bubble through an IPO of an ISP in March of 2000 on Nasdaq.

Mashable, which is a blog, nothing more (but I agree, a great blog) sells in March to CNN for 200m. 22 employees and Pete Cashmore indicating only 4 permanent, the rest being distance bloggers. Revenues not disclosed. 

Yahoo purchases Interclick for 270m late 2011.

Draw something, an app (yes, okay, a really good app) goes for 180-220m in March. Small company, app launched only weeks before the sale but good revenues. 

Apple today viewed as the highest Market cap ever at 600billion us dollars. Is there ever a company worth that? 

Instagram sells for 1billion usd in April to facebook

Anybody spot a trend? (And watch out for flipboard and pinterest)

In some ways this is the secret we daren't speak its name because a bubble we do want. More cash for more ideas, so we put down any talk of it. In fact, we talk it up. 

Big valuations too lure in investors not necessarily Internet savvy (remember myspace sale for 580m to Murdoch? Just sold to Justin Timberlake and pals in December for circa 50m). Those investors have cash through institutional or VC investing. And there's local Irish recent valuations that help confirm this.

There's no doubt ladies and gentlemen, that this is the space to be in. It has a real bright future. But highly excessive payouts and valuations serve no one, except sellers, in the long term. 

This is looking like another bubble. 

(Update April 24 - I mention here that the it seemed to me that there was an underbidder for Instagram which drove up the price. Reliable rumours abound that this was the case with Jack Dorsey (Twitter) being mentioned. Reliably!)