The Wall Street Journal
Investors Bid Up Internet Firms to Levels Reminiscent of the Last Dot-Com Boom
The technology-heavy Nasdaq Composite Index is relatively flat this year. Yet tech company valuations are rapidly rising in one area: closely held consumer Web firms.
Venture-capital investors and others have been bidding up the valuations of consumer Web start-ups this year, particularly of the firms that show the most user traction. In an echo of the 1990s dot-com boom, some investors also are giving lofty valuations to Web firms that have no revenue and that barely have a product out.
Among them: question-and-answer website Quora Inc. in March raised around $14 million in a financing round that inputs a value for the whole company of about $87.5 million, people familiar with the matter have said. The Palo Alto, Calif., firm didn't publicly launch its service until June and hasn't said how it will make money.
Another company, Blippy Inc., which allows people to share and discuss their purchases online with friends, raised $11 million in a deal valuing the whole company at $46 million earlier this year. In June, mobile-technology firm Foursquare raised $20 million in funding at a company valuation of $95 million, up from a $6 million valuation less than a year earlier, a person familiar with the matter said.
Valuations for closely held companies are typically guesswork. But the strong numbers for consumer Web companies indicate how parts of Silicon Valley's start-up market are bouncing back following the recession. The recovery already started showing up last year, when Twitter Inc. was valued at $1 billion during a round of funding, up from $95 million in mid-2008 when it raised a previous round of funding, according to research firm VentureSource, a unit of Wall Street Journal owner News Corp.
Some investors worry the lofty numbers signal that froth has returned to the Web sector. That can create false hopes for a company's performance, pressuring entrepreneurs and investors to gamble to live up to such expectations. Many investors won't recoup their investments, especially with the stock market having been relatively unreceptive to initial public offerings in recent years.
"Anytime you take an increase in valuation, then you're making an implicit promise that you have to meet and that's what's challenging," said Matt MacInnis, chief executive of Inkling, a San Francisco interactive textbook start-up. Last month, Inkling announced a funding round led by venture firm Sequoia Capital that included a bump-up in valuation to the tens of millions of dollars, said Mr. MacInnis. "Now the onus is on the entrepreneur to knock it out of the park or fail," he said.
The escalating valuations for consumer Web start-ups are reflected in the secondary market, where investors buy and sell the shares of closely held companies such as social-networking company Facebook Inc. On SecondMarket, which operates an exchange where investors can trade the stocks of closely held start-ups, the share prices of six actively traded private companies—including four consumer Web start-ups—rose an average of 39% between January and August, according to the company.
In contrast, the Nasdaq—which includes publicly traded tech behemoths such as Apple Inc. and Intel Corp.—is up just 3% so far this year through Tuesday. "There's a big disconnect between the public market and the private market," said Saar Gur, a venture capitalist at Charles River Ventures and an investor in Blippy.
While hot Web companies garnering high valuations aren't new, the speed with which valuations are jumping has quickened, said Silicon Valley start-up investors. Driven by the Internet's growing scale, Web companies can take off more quickly than before if they gain a toehold with consumers. That leads to valuations soaring more rapidly than in the past as venture capitalists and other investors fight for a piece of the momentum.
Deal-of-the-day site Groupon Inc., for instance, was founded in 2008 and quickly brought in consumers eager to tap its discounts. By April when it received a $135 million investment from Russian investment firm Digital Sky Technologies Ltd. and venture firm Battery Ventures, Groupon was valued at about $1.35 billion.
"Before, people didn't expect growth trajectories to be as fast," said venture capitalist Patricia Nakache of Trinity Ventures. "A lot of consumer Web companies are going from a seed investment and leapfrogging" in valuations.
Some Web entrepreneurs said they now have more power to drive high valuations than in the past. Since Internet firms are relatively cheap to build—all that's needed is several staffers and some computers—many entrepreneurs don't need lots of cash when investors call, said Philip Kaplan, a Blippy founder.
As a result, entrepreneurs may turn down funding until "investors say 'What do we need to do to make this happen,' " he said. "The ball is in our court."
