Special Report on Internet Companies (By Luthando)

A case in point Facebook: the popular, financially unproven social networking site, which is being valued by investors at up to $15 billion.

That Friend is nearly half the value of Yahoo, a company with 38, go that 38, times as many employees and, based on estimates of Facebook’s income, 32 times more revenue.

Google, which in October 2007 surged past $700 a share and today has found support at $450 is now worth just a bit less than IBM, a company with nine times more revenue and a certified Blue Chip.

Across the board, Internet start-ups are drawing investors based on their ability to build an audience, not bring in revenue.

The surge in the perceived value of some Internet start-ups has surprised some of the entrepreneurs who conceived, built and are benefiting this phenom.

Eighteen months ago, Yahoo (now the subject of a hostile takeover bid by Microsoft) invested in Right Media, a New York company developing an online advertising network. Yahoo’s investment valued the company at $200 million. Six months later, when Yahoo acquired Right Media outright, the purchase price had swelled to $850 million.

The Big Q: What changed?

The Big A: According to Right Media’s co-founder Brian O’Kelley, very little, except for the fact that Yahoo’s rivals Microsoft and Google were writing billion-dollar checks to buy online advertising networks, and Yahoo felt that it needed to pay any price to keep up. Yahoo has done this more then once, and now it appears what they accomplished is going to wind up in the Microsoft cultural quiver, thus a validation of the strategy.

O’Kelley, though he earned about $25 million in the transaction, said, “there is no way we quadrupled the value of the company in six months.”

The trend is described as a rational approach to unlimited opportunities presented by the Internet by true believers, in this sector, or insanity by skeptics.

There is a rush to pick the next big winner in this Internet boom. Further, there is a lot of money going on to the Green Felt because the Internet’s resurgence.

The numbers are huge as the thinkers and entrepreneurs are creating a new set of society-altering tools. Some of these companies will make some will not.
Putting a value on start-ups is a mix of science, optimism and speculation.

People indulging in this optimistic thinking are venture capitalists with a lot of cash from university endowments.

Here are some facts:

1) More than 1.4+ billion people around the world now use the Internet, many with speedy broadband connections with a willingness to immerse themselves in digital culture.

2) The flood of advertising dollars to the Web has become a major trend and a proven way for these new start-ups to make money, big money, while the revenue models of the “old” dot coms were often just dreams some of them were Technicolor dreams for sure.

“The environmental factors are much different than they were 8 years ago,” said Roelof Botha, a partner at Sequoia Capital and an early backer of YouTube. “The cost of doing business has declined dramatically, and traditional media companies have also woken up to the opportunities of the Web. That does open up the aperture for a different outcome this time.”

Some analyst mark the start of the new Internet action to eBay’s $3.1 billion acquisition of the Internet telephone startup SKYPE in 2005. Back then it was reported that EBay’s chief executive, Meg Whitman, outbid Google for the company. EBay acknowledged several months ago that it had overpaid for SKYPE by about $1.43 billion, but that it made no difference as SKYPE is a tremendous tool. Google’s acquisition of YouTube in 2006for $1.65 billion, under the same kind of bidding accelerated the transition to High valuations. Google executives and many analysts argued that YouTube was well worth the price tag if it became the next entertainment juggernaut, as we all know now You Tube is Huge beyond the assessments.

More than 250 million people visit YouTube each month, according to the research firm ComScore. Citigroup analysts estimated that YouTube would bring in $135 million in revenue in 2008. At that rate, the number of videos watched on the site would have to grow 1,642 percent. YouTube accounts for about 6 percent of Google’s revenue. Aaron Kessler of Piper Jaffray said that, ” The big Internet companies are buying users instead of revenue and profitability.”

The SKYPE and YouTube windfalls helped to give the newest batch of Internet entrepreneurs their current dreams of big time wealth. Back in the first .Com Gold Rush, Internet companies did not have to demonstrate to investors that they could make money; once again that is the case. Twitter, (http://twitter.com/) a San Francisco company that lets users alert friends to what they are doing at any given moment over their mobile phones, last year raised an undisclosed amount of financing for execute their business plan. Twitter is not focused on making money, and that no one in the company is even working on how to do make money, said its co-founder and creative director, Biz Stone. Corporate users have turned to the site both as a public relations tool and for in-house networking. Delta Airlines, for instance, uses its Twitter page to send out company updates and manage customer service. The cable channel Showtime even has a Twitter-only soap opera, a spinoff of the hit show “The L Word.” Fans of the soap “Our Chart” follow along by receiving real-time updates of what the characters are doing. Biz added, “We are focused on growing our network and our user experience,” he said. “When we have a lot of traffic, a clear business model will emerge.”

That is not illogical in the current climate. A European competitor, Jaiku, which has no income, was acquired in October 2007 by Google for an undisclosed sum. With the competitive logic that prevails at the major Internet companies, the deal may have further raised Twitter’s appeal to Google’s rivals. The high value placed on many Internet startups and minimal requirements for financial performance are raising expectations of other entrepreneurs. Sharon Wienbar, managing director of Scale Ventures Partners, an investment firm, cited the $100 million valuation that investors gave in 2007 to the Internet genealogy siteGeni.com, founded last year in Los Angeles by a veteran of PayPal. “Now every entrepreneur thinks he should get that,” Wienbar said. “I have a feeling a lot of entrepreneurs are secretly meeting for Martini’s and Stella’s, celebrating, ‘Hey mate, look what I got.”‘

Mr. O’Kelley, the Right Media co-founder, who is starting another company, said other entrepreneurs had begun to think that the financing game was best played by avoiding actual revenue, since that only limits the imagination of investors. There you go…that’s the new structure: avoid actual revenue! Another company benefiting from the action is Ning, a company that allows users to create their own MySpace-style, ad-supported social networks. Ning in 2007 was valued by investors at more than $200 million, mainly because its main backer and founder, Marc Andreessen, has a successful history with the Internet hits Netscape and Opsware.

Andreessen has argued on his blog that there is no bubble and that the high prices represent a rational desire to stake a claim in the potentially huge markets of the future. He also says companies that create mass-market hits always find ways to make money. Marc is correct in my opinion. There is an inexhaustible flood of capital helping to fuel this boom. Venture capitalists are flush with cash from institutional investors, eager for Internet style returns on their money, and that money has to go somewhere and the Internet brings back the highest valuations in our market.

Best regards,


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