Apr 27, 2012

Social Networks - a Bubble but Just Getting Started

Facebook's acquisition of Instagram has raised a few eyebrows but also has plenty of VC's and entrepreneur-wannabes salivating. If a 2-year old company with 13 employees and no revenue can be worth a billion dollars, well then the sky is the limit! As long as you are in the right space.

Since any of the staid cashflow or income-based models do not apply to this amazing growth sector, we need a brand new way of valuing such companies. One way people are looking at the recent acquisition
is that Facebook bought Instagram at $28 / active user. I think in 2000 it was $ / clicks per day.

Having said that, it is hardly time to try to short the industry. Even when it was clear to everyone that many of the dot-coms will never be profitable, the bubble kept going. For quite awhile. Normally rational investors were eager to jump on the bandwagon in order not to miss out.  Everyone else was getting rich, so why shouldn't they?

Social networks are yet nowhere near the dot.com excesses.  Back then there were plenty of meaningless companies with questionable business plans that were being taken at face value. Consider pets.com and WebVan among others. The social networking bubble is just getting started. We would probably need to see an explosion of various niche apps such as ones for exchanging cooking recipes or social networks specialising in mountaineering equipment before the market really sees the light.

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