Hot' Doesn't Equal 'Profitable
Nine new lessons to learn if you want to avoid the mistakes of the past.
Nine new lessons to learn if you want to avoid the mistakes of the past.
Hey kids! Ready to party like it’s 1999 (again)?
Yup, the IPOs are about to start flying fast and furious, just like the fabled heyday of the late-90’s dot-com era. Pandora, Groupon, Renren, LinkedIn…it’s a veritable “web 2.0” (whatever that means), social-media-disruptive-technology-paradigm-shifting-mobile-bonanza party out there. Heck, in the words of GSV Asset Management’s Michael Moe, “it’s like Christmas!“
Before unwrapping your presents (and jumping on the bandwagon), I’d suggest shaking the box more than a few times to try to figure out what’s in there first.
There’s no doubt that the companies garnering so much attention are pretty cool and undeniably popular. There probably isn’t anyone reading this who hasn’t cashed in on a great Groupon deal or two, fretted over their LinkedIn profile, or rocked out to Pandora more than once. But as the last bubble showed us, “hot” doesn’t always equate to “profitable” or even “sustainable.”
Look at Groupon. Big hype. Big IPO. Endless fawning by the tech/investor press. Huge estimates of valuation ($13 billion, according to the aforementioned Moe). But profits? Um…yeah…we’ll get back to you on that.
Here’s a reality check: Groupon lost $456.3 million in 2010, according to its IPO filing. It lost $146.5 million in Q1 2011. Sounds like a winner, huh?
But besides not actually making money, Groupon’s got bigger problems. A study by a professor at Rice University found that Groupon users are “cheapskates” and are highly unlikely to return to a business once they’ve cashed in their Groupon chit. A new book’s out that looks in depth at the company’s business model and calls it the “worst marketing for your local business.” And while Groupon still stands by its claims indicating high satisfaction among its customers, its own S-1 filing shows that its model is deteriorating in its oldest markets.
Surprised? I’m not. Groupon has all the classic hallmarks of the 90’s era dot-com failure. Big new idea: check. Media hype: check. “Too good to be true” come-on to consumers: check. Endless need to expand into new markets/acquire new customers or perish: check. One-trick pony: check.
But Groupon’s not alone. Pandora’s share prices have now fallen below its public offering price of $16 (after trading as high as $26). After surging forward in its first day of trading, Chinese social networking company Renren has been on a downhill slide ever since investors began to wake up after their IPO partying to realize that the company isn’t actually making any money. LinkedIn’s been on a downhill slide, too…but at least it actually has positive profit numbers.
And then there’s Facebook. Ah, Facebook…the great white whale of IPOs that continues to taunt us from just beyond the horizon. Investors are salivating at the thought of getting their money (or, more likely, somebody else’s money) in on the ground floor of what’s sure to be a feeding frenzy. According to The Wall Street Journal, “experts” are estimating that Facebook is worth $100 billion, placing it somewhere in the same neighborhood of Intel, Merck, and Bank of America.
Makes sense, right? Did those companies have movies made about their founders? After all, Facebook is making money – the estimates for 2011 run around $2 billion before interest, taxes depreciation, and amortization (EBITA for you insiders out there) – and it’s got a global audience of over 685 million users. Isn’t Facebook worth 50 times its earnings?
Ahem. Things are beginning to crack around the edges a little bit. While Facebook is still growing globally, it’s also beginning to lose users in the U.S. and Canada. Why? Nobody really knows, but I’m going to go out on a limb and predict that once the original thrill of finding your high school girl/boyfriend wears off and you’ve received your 10 millionth notification about fertilizer from your FarmVille-addicted “friends,” many folks are just burning out or simply using the service a lot less while they take care of their offline lives or move on to other pursuits.
Am I saying that Facebook is doomed? Absolutely not, though who knows what it will look like 10 years from now (anyone remember Friendster?) However, to believe that things are always going to be as they are now is both foolish and ignorant of history. Facebook rules the roost now, but competitors that address its shortcomings are starting to nibble at the edges. From the open-source Diaspora Project to Altly, started by long-time entrepreneur (and ex-MySpace exec) Dmitry Shapiro, alternatives that address Facebook’s privacy shortcomings and heavy-handedness are ready to jump on the social media bandwagon. Some will certainly fail, but they’re not going away.
Perhaps the best way to understand what’s going on right now is the “hype cycle,” a model developed by Gartner to describe the rapid rise, precipitous fall, and occasional recovery and adjustment back to normalcy that goes along with every new technology or business model that appears to be “the next big thing.” Exciting technologies rise to a peak of inflated expectations where pundits declare “everything’s different now.” People jump on the bandwagon and soon learn that hype doesn’t match reality causing many of them to hop right back off the bandwagon. However, if a technology does turn out to be truly useful and solves a problem, the naysayers may come back (along with the late-adopters who just learned about the whole thing) and everything eventually settles down to a plateau where “the next big thing” becomes just “yet another thing” in our lives.
When I published the “Dot.Bomb Survival Guide” back in 2001, I tried to draw a number of lessons from the tech bubble that would help companies, investors, pundits, and marketers avoid the “irrational exuberance” that consumed so much time, money, and talent in the mad rush to riches on the “information superhighway.” I looked at a huge number of dot-com failures and was surprised to learn that the whole thing really came down to the fundamental fact that business is business. Companies have to make a profit to survive. Markets can’t expand forever. The majority of consumers aren’t early adopters and if startups focused on broad consumer markets want to survive, they have to be able to both appeal to the latecomers and have enough capital to survive until they come on board.
I learned that the industry press often functions as a feedback loop, as early adopter techies whip other early adopters into a frenzy over the next big thing while the majority of the world goes about its business blissfully unaware of the buzzwords. I learned that the real money is made by those who service the startups and absorb the capital through facilitating deals, making ads, selling media, providing legal counsel, and all the other professional services the industry needs. Sure, some of the top execs who were able to cash out made bank, but the rank and file who toiled like galley slaves, lured by big dreams of “IPOs” and “stock options” rarely saw the payday they envisioned. And finally I learned (as we all hopefully have post-dot-bomb and post-mortgage bubble) that if it looks too good to be true, it probably is.
So that’s the past. Times are different. It’s not the wild west of the late 90’s. The Internet has become ubiquitous, social media really is changing things, and we’re all more connected than we’ve ever been with an ever-growing number of devices. We’ve learned a lot over the past 15 or so years, but there are new lessons to learn if we want to avoid the mistakes of the past:
Are we at the beginning of another bubble? I hope not, but it seems that we could head that way. Let’s not forget the lessons of the past and let’s not forget to listen to our gut when it tells us that something’s just not right.