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Published 31 May 2012 03:45, Updated 01 June 2012 08:09
Silicon Valley watchers have shrugged off Facebook’s dismal first week as a listed company. The managing director of Menlo Park-based venture capital fund Bullpen Capital, Duncan Davidson, has a simple view on why this is not the peak of the next dotcom bubble.
“Don’t confuse a company with a stock,” he says. “Most likely Facebook is not the end of anything [but] it’s own image has been terribly tarnished. So has Morgan Stanley’s.”
The investment bank and the social network company have both come under fire for decisions such as increasing the amount of stock available to the public by 25 per cent at the last minute and setting an asking price at the higher end of a suggested range despite some concerns that were not widely disseminated that revenue forecasts would be at the lower end of its guidance.
“Facebook’s problem is they fumbled the offering, tactically,” Davidson says. “In a way it’s a story of hubris.”
He notes that the speed with which shareholder class actions were filed. “That’s not a good thing to have on your record,” he says. “But this is all IPO noise. It doesn’t mean the company isn’t a really good company and after raising all the money, they’re a much stronger company than they were a week ago.”
During the previous dotcom boom, Davidson took two companies public. The second, a digital rights management software company Intertrust Technologies, listed at $18 on the Nasdaq in 1999 and three weeks later was trading at $135 a share, he remembers.
It was acquired in 2003 “for a lot of money ... It was a very good company but its valuation got to $9 billion on $1 million in revenue. That’s a bubble,” he says.
“This [time] is nothing like that. These companies that are going [public] have much more substantial either real user bases or revenue potential.”
The executive editor of online news outfit VentureBeat, Dylan Tweney, says the main difference between then and now is that the tech wreck of the early 2000s saw the dotcom and telecom bubbles pop at once. “Although the telecom collapse blew up far more wealth than the failed dotcoms, it is sort of hidden because the dotcoms were much more visible in the media,” he says. But there are “three big booms” happening now: social networking, mobile and cloud-based services.
“Facebook may very well be the peak of the social networking bubble,” he says. “The fact that it paid $1 billion for a photo-sharing app with a few hip filters may soon seem as ridiculous as Yahoo!’s ... purchase of Broadcast.com. But there is still a huge shift to mobile devices under way and coupled with that a shift to locate computing power and data in the cloud. Those changes are massive and won’t be derailed by a few bad investments in social networking.”
A partner at suburban Mountain View-based accelerator 500 Startups, Christine Tsai, says the wider technology scene is too vibrant and resilient to be put off by Facebook’s 16 per cent drop after six days of trading.
She says start-ups look to Facebook’s IPO – shakiness aside – for inspiration. The reality of Silicon Valley’s interconnectedness, however, is that many of them will consider it a precursor to a forthcoming cash splash among newly minted angel investors.
Australian Geoff McQueen of cloud-based software company AffinityLive moved to Silicon Valley this year and has raised a small amount of seed funding from US investors. Facebook’s IPO is expected to unleash up to 850 millionaires on the market, “who then turn around and say which business am I going to start next or invest in?” McQueen says.
“That’s why Silicon Valley is so special,” the managing director of Australian fund Southern Cross Venture Partners, John Scull, says. “Brain power is like water. It flows to where it is maximised.”
The writer travelled to San Francisco as a guest of Alcatel-Lucent.
A collection of technology company IPOs in the past year and a half
One reason investors and entrepreneurs have shrugged off Facebook’s performance may be that on paper, it has not performed out of step with others companies in the latest wave of tech stocks. An outlier is LinkedIn, but when it went public in May 2011 only 8 per cent of the company was up for grabs, which stoked demand.