LinkedIn started the latest round of Social Media IPO mania with a now $7.11B valuation, followed quickly by Groupon’s SEC announcement of its intent to raise $750M for their IPO. 2011 is the “Chinese Year of the Bull” with RenRen, Kaixin001, and several other social-media knockoff companies following suit. Twitter’s much anticipated IPO and the recent estimate of Facebook’s IPO to exceed $100B will occupy our attentions for months. With the addition of several other technology companies (Pandora, Zillow, Avaya), will we be caught up in a buying frenzy or is this ultimately good for the sluggish economy? Will this be the “Great Social Media Bubble” or economic salvation?
First, a quick “bubble” history lesson (and we will keep the complex economic theory to a minimum, thank you). In general, bubbles occur when high volumes of trade occur at values of an inflated nature. The bubble rapidly inflates by the high volumes of trade, but is unable to sustain itself and collapses, also known as “boom and bust.” Bubbles are not a newly crafted phenomenon. The term was coined from the South Sea Bubble in 1720, from the overvaluation and speculation of the South Sea Company. Most of us now know of Tulip Mania from the 1630s, where a single bulb was valued at roughly $37,000. There has been a major bubble each century, with at least 3 major ones in the 20th century (ending with Dot-Com) and at least one major one (Real Estate) in this new century. While there is great debate on how to predict bubbles, they – like visiting in-laws – can appear without warning, have damaging long term effects, and have the ability to baffle even rational, intelligent people.
Bubble, Bubble, Toil and Trouble
Are we setting ourselves up for another bubble or is this ultimately good for our economy? There is little doubt that values of these companies are mathematically inflated, with LinkedIn trading as high as 31-times its annual sales. Groupon’s intent to raise $750M comes under speculation (read Forrester Research Sucharita Mulpuru’s fantastic article) as the company still can’t reach profitability with its $644M in revenue in Q1. RenRen was just recently stalled as they were given a Hold rating by underwriters Deutsche Bank, who helped lead their IPO to $14 and are now down to just under $9. The others will rush to market prior to Facebook’s much anticipated 2012 IPO.
WWRHD: What Would Reid Hoffman Do?
A big piece of this is what do newly printed billionaires do with their money? If you believe that Reid Hoffman (founder of LinkedIn and now valued around $1.5B) will reinvest his newly minted money back into LinkedIn, new ventures and ultimately back into the economy, you probably fall into Jean-Baptiste Say’s camp, who said that buying power would only increase with more production. Namely, the way out of economic hardship is by reinvestment – that it is irrational to hoard it. If you think Reid will stockpile his new found gains and wait until economic conditions favor it, you probably fall into John Maynard Keynes’ camp in which saving will ultimately lead to the bubble bursting. Lack of reinvestment – due to a myriad of reasons (unstable economy, for example) – keeps the bubble from sustaining itself and lends to its collapse.
With a new CNN poll suggesting that 48% of Americans believe an economic depression – not just a recession – will occur within the next 12 months, do we care? 44% of Americans in that same poll stated that they will NEVER buy stocks again, leaving the decisions up to the remaining 56% of us. What is great about bubble is they are totally unpredictable. What is not unpredictable, is that the economy and how to ultimately handle these future IPOs will be much debated for the 2012 election cycle. Until we figure this out . . . Reid, if you are reading this, I have this great idea for start-up. Call me!
- LinkedIn IPO Leads To Fear Of Another Bubble Episode (convonix.com)
- LinkedIn IPO: Is It a Good Buy? [POLL] (mashable.com)
- What Does the LinkedIn IPO Signify? (pbs.org)
- LinkedIn IPO: Plenty riding on it (cbsnews.com)