When Simple Math is Replaced by Speculation

[KevinG]

Isn't it quite simple to know that profits, at the end of the day, mean much more than traffic to a web site?

Super simple, right?

From yesterday's NY Times

Silicon Valley Start-Ups Awash in Dollars, Again

SAN FRANCISCO, Oct. 16 — Silicon Valley’s math is getting fuzzy again.

Internet companies with funny names, little revenue and few customers are commanding high prices. And investors, having seemingly forgotten the pain of the first dot-com bust, are displaying symptoms of the disorder known as irrational exuberance.

Consider Facebook, the popular but financially unproven social network, which is reportedly being valued by investors at up to $15 billion. That is nearly half the value of Yahoo, a company with 38 times the number of employees and, based on estimates of Facebook’s income, 32 times the revenue.

Google, which recently surged past $600 a share, is now worth more than I.B.M., a company with eight times the revenue.

More broadly, Internet start-ups are drawing investment based on their ability to build an audience, not bring in revenue — the very alchemy that many say led to the inflation and bursting of the dot-com bubble.

The surge in the perceived value of some start-ups has even surprised some entrepreneurs who are benefiting from it.

A year ago, Yahoo invested in Right Media, a New York-based company developing an online advertising network. Yahoo’s investment valued the firm at $200 million. Six months later, when Yahoo acquired Right Media outright, the purchase price had swelled to $850 million.

What changed? According to Right Media’s chief technology officer, Brian O’Kelley, very little, except that Yahoo’s rivals, Microsoft and Google, were writing billion-dollar checks to buy online advertising networks, and Yahoo thought it needed to pay any price to keep up.

“I have to say I giggled,” Mr. O’Kelley, 30, said of the deal that earned him millions. He has since left Right Media and is starting another company. “There is no way we quadrupled the value of the company in six months.”

The trend is described as a return to madness (by skeptics) or as a rational approach to unlimited opportunities presented by the Internet (by true believers). Greed, fear and a desperate rush to pick the next big winner are all adding fuel to the fire that is Silicon Valley’s resurgence.

“There’s definitely a lot of betting going on, and it’s not rational,” said Tim O’Reilly, a technology conference promoter and book publisher.

Mr. O’Reilly is credited with coining the phrase “Web 2.0,” which refers to a new generation of Web sites that encourage users to contribute material. His Web 2.0 conference, which begins Wednesday in San Francisco, has become a nexus for the optimism around the latest set of society-changing online tools. But that has not stopped Mr. O’Reilly from worrying that the industry is minting too many copycat companies, half-baked business plans and overpriced buyouts.

When the bubble inevitably pops, he said, “there are going to be a lot of people out of work again.”

Putting a value on start-ups has always been a mix of science and speculation. But as in the first dot-com boom and the recent surge in housing, seasoned financial professionals are seeming to indulge in some strange instinct to turn away from the science and lean instead on the speculation.

This time around, people indulging in that optimistic thinking are not mom-and-pop investors or day traders but venture capitalists whose coffers are overflowing with money from university endowments and hedge funds. Many of those financial professionals say that this time, everything is different.

More than 1.3 billion people around the world use the Internet, many with speedy broadband connections and a willingness to immerse themselves in digital culture. The flood of advertising dollars to the Web has become an indomitable trend and a proven way for these start-ups to make money, while the revenue models of the dot-coms of yesteryear were often little more than sleight of hand.

“The environmental factors are much different than they were eight 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,” he said.

Some trace the start of the new bubble to eBay’s $3.1 billion acquisition of the Internet telephone start-up Skype in 2005. EBay’s chief executive, Meg Whitman, reportedly outbid Google for the company. This month, eBay conceded it had grossly overpaid for Skype by about $1.43 billion, and announced that Niklas Zennstrom, a Skype co-founder, had left the company.

http://www.nytimes.com/2007/10/17/bu...th&oref=slogin

Makes me think about trying to sell some of my stuff.

[EmporerEJ]

I would like to officially announce that the Virtual Sex Machine, trademarks, patents, et all can officially be purchase for the bargain basement price of
$547.6 million dollars.

Tomorrow? Who knows.

[Toby]

Originally Posted by KevinG

Isn't it quite simple to know that profits, at the end of the day, mean much more than traffic to a web site?

Ask that of the guys that sold YouTube to Google.