The news that LinkedIn's market cap has increased to over $8bn has raised alarm bells regarding overvalued tech companies. With the likes of Groupon reaching an estimated worth of $15bn, there are concerns that we're in an all too familiar tech bubble. These skyrocketing values echo those of a decade ago, when the investments of non-tech-savvy investors shot up to create over-inflated valuations.
My view is this: firstly, I don't believe LinkedIn is overvalued. There are products in the pipeline that can crystalise more value from the LinkedIn customer base and increase revenues.
As to whether we're in a tech bubble, a bubble starts when valuations of certain businesses start to diverge from the underlying true market trend. This happened in 1999 when crazy valuations were happening for companies with no revenue! It's different this time around as companies have real revenues. Groupon is only two years old and is already generating $1bn plus in turnover.
I think it's too early to confirm if there is a bubble, but there are secondary indicators that give me the impression of the early stages of one. For example, the valuations of companies at the early angel investor stages, the valuations on the secondary markets of Facebook and Twitter, and the planned IPOs of these companies, could all point to the makings of a tech bubble.
Once Facebook's IPO is announced - ostensibly later next year - this will fuel investment by non-tech savvy investors, who will plut their cash into less successful companies at over-inflated valuations. And a bandwagon is created.
People point to the Facebook IPO as being the equivalent of the Netscape float in 1995. But remember, the peak of that bubble didn't happen until the end of 2000. We've learnt a lot from this cycle and the market information that wasn't available last time. I think Facebook's coming IPO will accelerate the cycle, and potentially bring about a peak of investment in the next two to three years.
We experienced the first bubble raising VC investment in 1999, and just scraped through the dotcom crash when many didn't. This time we have real accelerating revenues and are attracting investment for the right reasons - raising $2.25m series A investment in September 2010, and funding from silicon valley-based 500Startups in March 2011. As such, small and medium businesses are paying for our simple, intuitive, design led website builder in droves.
I'm constantly watching to see what part of the cycle we're in and how that affects Moonfruit's business. But the first priority will always be to run and accelerate a sustainable business, and think about the market valuation second.
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