by: Christine Swartzendruber,Chief Technology Officer
Today as my Facebook page popped up and messages from friends and family displayed on my screen, I had a thought, “Is Facebook really worth $50 Billion?” This number is based on a private market transaction disclosed to TechCrunch Co-Editor and Founder, Michael Arrington back a few months ago in November, 2010.
As I sat typing my daily status of how many cups of coffee I would need to get through the day, I wondered how this site could be worth this much money. Yes, most people have a Facebook account and it has to a large degree become the way we interact with friends and family both near and far, but $50 Billion?
I remember the dot-com era bubble in 2001, how it burst and created near-devastating effects. Most of the companies involved went out of business, many investors lost substantial amounts of money, and a mild economic recession began. Analysts have said that some investors have not been sobered by that burst and have now began to dump mass amounts of cash into what’s been termed, Web 2.0.
Many factors combined to cause the burst. Companies engaged in unusual and daring business practices with the hopes of dominating the market. Most engaged in a policy of growth over profit, assuming that if they built up their customer base, their profits would rise as well. Investors responded to daring business practices with money; lots of it. The American stock market rose dramatically.
Unfortunately for many companies and investors, the growth of the tech sector proved to be illusory. Numerous high profile court cases targeted tech companies for unscrupulous business practices including borderline monopolies, and the stock market began to tumble down in a serious correction. A decline in business spending combined with market correction to deal a serious financial blow to many dot-coms, and tech companies began to fold, one by one.
Fast forward to 2011. Investors say, “everything is different this time.” Getting back to Facebook, the company is valued at over $50 billion, but it is not as profitable as you might think. They make the majority of their money with their advertisements, but Facebook users are not actively searching for products or services. They are not in the buying mode. They want to chat, flirt, socialize, and monitor their friends and family. Users have gained an ever-increasing ability to ignore unwanted banner ads. Some big brand advertisers might throw some money at Facebook, but this won't allow it to measure up to the crazy valuation that has been placed on it.
This week Mashable conducted an online poll to see how web users feel about current startup valuations and investments. The results show that 62.3 percent of those polled believe that we are headed for another crash. They sited valuations as being too high and investors as being too optimistic as reasons for their speculation.
In my opinion, start-ups are drastically over valued and profits just wont measure up to the projected numbers. Everyone has a great idea, and technology start-ups are popping up all over the place. Caution is key, especially in this economy. It seems that the last thing we need after a failed real estate market is another crash in a major financial market. A more guarded approach to startups is the very thing that could spare us from another devastating bubble-burst.