Bubblewatch

Facebook went below $30 today, on its way to a 25% price drop from float price amidst lawsuits, disgruntled investors etc etc. But we are more interested in what this has done to the whole Social Media bubble we have been watching.

By re-pricing and increasing the number of shares floated to grab every penny that was ever going to be on the table, and then having such a fiasco of an IPO, it may be that Facebook has burst the whole Social Media bubble. Just as all boats rise in an incoming tide, all sink in the great sucking sound of a rapidly retreating one - Zynga et al have all fallen far farther, far faster than Facebook.

But, of far more selfish interest to us is the future of the Broadstuff Bubble-O-meter. Right now it looks like Facebook has also closed the market for future IPOs. In the beginning of May the Social Media space was hyped to the nines. At its height we saw stories of retail investors (aka "suckers") throwing 40-K, School Fee money and various other essential savings into the gamble (Bubble-O-Meter stage 9), but then - instead of a pop and a frothy rush to Stage 10 and a horde of wannabeee SocMed IPOs behind it, there was a slow hissing sound of a bursting bubble, and by end May the Bubble-O-Meter lies spent on the floor, like the previous nights' rubber johnny, leaving a stain of a high watermark that came - and went - in a matter of minutes. One thing is for certain, the bubble ain't going to re-inflate for quite a while (I'd bet a lot on not in 2012, and probably not 12 months) no mattre how hard the Silicon Valley PR machine huffs and puffs.

And so, we are left with large questions - Will Facebook do a Bubble-O-Meter Stage 10 and buy an Old Media darling with a $16 billion war chest? Or how far back has the Bubble-o-Meter fallen? Or maybe both are true, if Facebook took all the loot on the Social Meedja table so there ain't no more for anyone else? In either case, how long will it take to re-inflate the Social Media bubble? Will it ever inflate again - is this it? Will the Silicon Valley economy collapse again? How many of the Silicon Valley Cheerleader blogs will survive? What Phoenix 3.0's will emerge from the ashes? Has Facebook smartly engineered a Big Bubble Bang behind it to ensure no one can follow it out the gate? How much more can we flog the Bubble-o-meter now that the horse has bolted?

At least we can predict the floor for the stock - with $16bn in the kitty, we calculate Facebook shares are worth at least $6!

Postscript - last Friday I gave a talk on the role of hype in bubble formation - as Facebook was IPO'ng - and noted that once the hype peaks and the slide into the Slough of Despond starts, it is a quick fall for a long way, and an irreversible one at that. Lets see if Facebook follows form.

With this IPO, even an an old cynic like me eventually thinks "nah, now that could never happen, surely" - it does. SEC enquiries, Class action law suits....Reuters:

Facebook Inc and lead underwriter Morgan Stanley were sued by shareholders who claimed they hid the social networking company's weakened growth forecasts ahead of its $16 billion initial public offering.

......

The lawsuit claimed that the defendants, including Facebook Chief Executive Mark Zuckerberg, Goldman Sachs Group Inc and JPMorgan Chase & Co, concealed "a severe and pronounced reduction" in revenue growth forecasts resulting from greater use of Facebook's app or website through mobile devices.

It also accused Facebook of telling its bank underwriters to "materially lower" their forecasts for the company. The lawsuit said the underwriters disclosed the lowered forecasts to "preferred" investors only, instead of all investors.

......

On Tuesday, law firm Glancy Binkow & Goldberg said it filed its own Facebook lawsuit in California state court on behalf of an investor.

Nasdaq OMX Group Inc was also sued on Tuesday by an investor who claimed the exchange operator was negligent in handling orders for Facebook shares. Morgan Stanley said it is reviewing Facebook trades and would adjust prices for some retail customers who overpaid.

........

Regulators including the U.S. Securities and Exchange Commission, the Financial Industry Regulatory Authority, and Massachusetts Secretary of the Commonwealth William Galvin are looking into how the IPO was handled. The U.S. Senate Banking Committee is also reviewing the matter.

........


Citing people with direct knowledge of the matter, Reuters this week reported that Facebook during its IPO road show advised analysts for its underwriters to reduce their profit and revenue forecasts.

It also said underwriters Morgan Stanley, Goldman Sachs, JPMorgan and Bank of America Corp cut their forecasts after the May 9 prospectus was filed but that these cuts were not publicly revealed before the IPO.

"If Facebook faced a known and particularly salient risk, boilerplate language would be insufficient," said Elizabeth Nowicki, an associate professor at Tulane University Law School and a former SEC lawyer. "If Facebook told underwriters to lower their forecasts, it would certainly be material."

Bank of America and Barclays Plc are also defendants in the New York case, as are Facebook Chief Financial Officer David Ebersman and several Facebook directors.

My reaction to this was twofold:

Firstly, that there was a lot of very good independent comment out there saying the same thing, so investors who lost their shirts have only themselves to blame.

Secondly, reflecting on my time in the DotCom era, to wonder what - despite all the supposed "improvements" in banking systems in the last decade - has actually changed. Same drivers, same behaviours, same activities, same old same old.

And now there are even people saying the "NASDAQ Glitch" may have been engineered. Right now, I can believe anything.....

Update - US Congressional Committee tolook at IPO - Reuters:

The U.S. House and Senate committees that oversee financial sector matters are planning to look into the issues surrounding Facebook Inc's initial public offering, aides to both committees said on Wednesday.

Sean Oblack, a spokesman to the Senate Banking Committee, said the review will focus on "issues raised in the news" and that staff will be conducting briefings with "Facebook, regulators and other stakeholders."

Watching the stock fall, and the fall out from the Facebook IPO Fiasco has been very entertaining, in that never have I seen so many vested (or would that be invested) interests hoisted on such sky high petards:

1. The "IPO was wonderful" lobby were shut up after Monday morning trading. If it looks like a Turkey.... (In fact now we are seeing the opposite, as everyone lines up to say they knew it was all way overpriced all along. Did they hell, we felt positively alone saying that before the last few days )

2.The Investment Banks told their favoured customers that they were cutting the forward forecast after the latest data - besides being unheard of, these people had 7 days to act, so they really have no excuses.

3. Those IB clients who were not told are apparently Very Upset - but methinks they protest toomuch - for such supposedly smart and in the groove people, it beggars belief they were unable to do the maths themselves when the news of the changes toshares and price was made public - even reading a few knowledgeable blogs (like this one ) and newspapers would have told them that there was a bad moon on the rise.

4. No, I suspect they still thought they could still flip their shares to the Greater Fools out there, but the NASDAQ glitches meant they couldnt - so for once the dumb money was saved from its own stupidity. Hooray for NASDAQ , for once our pensions have not been sucker punched.

5. And now there is a desperate scramble to get NASDAQ to make up their losses, and it would appear the under-writing banks can't even short the stock to wash their faces

And now the Regulator is getting interested in that selective disclosure....:

Reuters reported that Morgan Stanley selectively disclosed the change in Facebook estimates, which drew the attention of the main regulator of U.S. brokerages.

"That's a matter of regulatory concern to us and I'm sure to the SEC," said Richard Ketchum, the Financial Industry Regulatory Authority's chairman and chief executive. "And without saying whether it's us or the SEC, we will collectively be focusing on it.

I think times are about to get interesting... this is just the end of the beginning.

Actually, I rather admire Facebook in a perverse way - they used others' predictable greed to rake every penny that anyone was ever going to put on the table into their own trousers, into the biggest war chest ever. They won't need to tap the markets again for ages - probably just as well, the banks won't be laughing.

Still, if you look at the whole Facebook Story of their culture and ethos from Day One, why would one be surprised

The Facebook IPO really has also been a Tale of 2 Cities - or rather, one city and the Rest Of World. Lets face it, an IPO of this level of hype that sputters, which still forces the under-writers to step in and buy the shares to keep it at the out-the -gate share price, is a Fail. Yet I see many of the Valleyblogs are still faithfully drinking the Kool Aid, while most everyone else is more sanguine - Techmeme records the roster of Kool Aid drinkers and Uh-Oh sayers:

Everything is Rosy through the Kool Aid Lens

John Paczkowski / AllThingsD: - The Price Is Right: Facebook Closes Near Opening Price
Dan Primack / Fortune: 38 Special: Facebook bankers got it right
Erin Griffith / PandoDaily: No Pop Equals a Flop? Welcome to the Irrational World of Public Markets, Facebook
Don Dodge: - Facebook did a great job with the IPO. 500M shares traded and it closed at $38, where it opened. Fairly priced, optimized proceeds to FB.
Lizette Chapman / Venture Capital Dispatch: Greylock's David Sze: Facebook Has Three Things Great Companies Need
Amit Chowdhry / Pulse2 Technology and Social Media News: Mark Zuckberg: “Our Mission Isn't To Be a Public Company”

Uh Oh

Larry Dignan / CNET: - How Facebook's bankers saved an IPO, kept shares above $38
Kim-Mai Cutler / TechCrunch: - Bankers Got Too Aggressive With Pricing Facebook As They Struggled To Keep Shares Above $38
Wall Street Journal: - Facebook's IPO Sputters
Business Insider - Facebook holds the IPO price after war of $38
Michael Hiltzik / Los Angeles Times: Facebook's epic fail
Los Angeles Times: Facebook IPO falls short of the hype
Reuters: Overhyped? Facebook shares stumble on debut

As you can see (with the interesting exceptions of Forbes & TechCrunch), you can define who says what pretty much by closeness to the Facebook epicentre

Incidentally, quite a few of the stories say "observers expected the shares to rise" - I want to know who those observers were, and what they had been drinking over the last few days! They were clearly not reading the newspapers, blogs or financial magazines outside the Kool Aid bubble! (see Tale of 2 Cities - Part 1)

Longer term, pricng it this high really puts the future Facebook under pressure. I think Brent Hoberman's piece in the Guardian said it best - Facebook was "priced for perfection" - meaning they would have to execute perfectly from now on:

The night we went public and raised £120m, Martha and I were very subdued. It felt as if we had the weight of the world, and our employees, on our shoulders, and that the company was priced for perfection. That was massive pressure. However, now I look at Zuckerberg and see someone who really does have the weight of the world on his shoulders, is only 28, and doesn't have a proper business partner.

I had hoped Facebook would resist the temptation that we also felt, to raise the price too much. In our case I'm not sure the added pressure was worth it, and in theirs they really don't need the extra money. I suspect Zuckerberg will feel that pressure, that his world is surreal. But he will be happy that he has been given this chance to continue to change the world – and follow his passion. And that his creation's future is assured for some time to come.

Update - another SV Pangloss-over on TC on Sunday, my favourite line:

According to the pundits, what really matters is that the stock price didn’t increase in value–or “pop”–post IPO and is being propped up by banks.

Actually, what the (indpendent and knowledgeable) pundits were really noting that what mattered was the underwriting banks were having to come in big time to support the price. Monday should be very interesting....

Well, its all over bar the shouting....they went out at top of range. Facebook overhyped, plus the Punters Overoptimistic had led to an oversubscribed IPO. The Funders have taken their money, its over and out for them - which just leaves facebook under pressure to perform well enogh to step into that $100bn+ valuation.

Still, with $14bn+ in the bank, no one will be worried about cashflow for a while.....

Update - talking about Under Pressure, the stock ended Day One at the nearly same price it set off at, with the under-writing bankers jhaving to do a lot of buying to keep it there - WSJ:

Facebook's underwriters battled to keep the stock from slipping below its offering price of $38 a share. Such a stumble would have been a significant embarrassment, particularly for a prominent new issue like Facebook, the most heavily traded IPO of all time.

Next week should be interesting....

Bloomberg survey - 79% think Facebook is overvalued - so who is over-buying all this stock?


Readers of this blog may know that we are a tad sceptical of the IPO valuation price (We wrote this in February):

So, what do we have to believe to believe that Facebook is worth the $100bn?

Firstly, you need to believe that the numbers are even achievable. A valuation of $100bn on a user base of 845m implies a valuation of c $118 per user, within a reasonable timeframe. In financial modelling that is usually taken as 5 years. There are about 2 billion people online today, most estimates think it will be about 3-3.5 billion in 5 years or so time, a reasonable estimate of the the maximum Facebook user base is probably in the region of about 1.5 bn, ie roughly double today, so let us assume the endgame is the valuation of $100bn over 1.5m people, ie about $70 per person in 5 years time. A simple approximation therefore is that Facebook needs to go from c $70/5 = c $15 ARPU, from the c $4 today. Incidentally, Google's ARPU is about $18 today. So it comes to this - do you believe that Facebook can eventually make the same sort of ARPU as Google does, and keep its current market share? Bear in mind that the next 800m people Facebook adds will have much less disposable income than the current 800,000, so the ARPU growth in ratio terms is far higher than Google had to do, as it grew from a smaller base into a wealthier market.

Secondly, long term, ultimately valuation is based on profit. Facebook has a higher profitability than Google at IPO, at c 25%. Google's IPO was c half of that and it only hit the c 25% sort of ratios c 2 years after IPO, and has more or less stayed at around that level. Google now has a c $150bn valuation on c $40bn revenues and c $10bn profit, so for Facebook to justify $100bn longer term you have to believe it can hit c $6-7bn profits, ie revenues of c $24-28bn in about 5 years, and maintaining profis at about 25%. So the question is do you believe there is a sustainable 6-7x growth in profits?

Thirdly, to believe the above two things, we pretty much have to believe that Facebook has as easy or easier a time in the next 5 years than Google has had, ie you have to believe competition and regulatory interference (little surprise the Facebook is beefing up its lobbying arm) will be at worst the same, preferably better and that it makes better use of its cash in funding its growth.

Now this is not a "proper" analysis, but it does bracket the relative IPOs and trajectories for comparison. What it boils down to is that Facebook has set a significantly higher value per dollar earned and user gained than Google, and you have to believe Facebook gets a fairer wind for the next 5 years than Google had over its first 5 years post IPO to justify the $100bn valuation. In other words, you heve to believe it is a (2x) better company than Google.

At that time we wrote that, it seemed Facebook could do no wrong (There Is No Bubble!), and we seemed to be our usual lone contrarian voice. Lets be clear - they have done some amazing things (and some less amzing, like their approach to privacy), and are run and funded by some very smart people - but nothing we have seen in the last few weeks make us change our mind, in fact as valuations go up yet business numbers go static, you have to believe even more things will go very very right right for a very long time.

But what has been interesting to watch is in the run up to IPO, an interesting split in attitude is opening up between US West and East Coast thinking, between San Fran and New York states of mind, if you like. Yes, the New Yorkers are becoming more sceptical (whats thay you say - New Yorkers are always sceptical). 79% of Bloomberg readers think its overvalued (see graphic above), Madison Avenue, the Wall Street et al are a tad sceptical aboutthe valuation into question now:

NYT on Madison Avenue:

On Tuesday, General Motors, the third-largest advertiser in the country, shut down its Facebook budget, about $10 million, saying that those ads were simply not doing enough to sell automobiles. For Facebook, the loss of $10 million is not a big deal. The company generated $3.7 billion of revenue last year, 85 percent from advertising. But the loss underlines the company’s need to convince a skeptical Madison Avenue that Facebook pages are the perfect vehicle for marketers and to convince eager investors that it can increase its advertising revenue, and quickly.

“It’s one of the most powerful branding mechanisms in the world, but it’s not an advertising mechanism,” said Martin Sorrell, chief executive of WPP, the giant advertising agency.

WSJ on Wall Street

The smart money is flying out of Facebook as the dumb money piles in. A week ago, Facebook was targeting a valuation of $77 billion to $96 billion in its IPO and early investors were already looking to book plenty of profits by selling their own shares to the public. Venture capitalists Peter Thiel and Accel Partners were planning to sell up to 20% and 22% of their stakes respectively in the offering. Fast forward to this week. Facebook has raised its target price range to as much as $104 billion. Now, some early investors want to sell a lot more.

Accel Partners plans to sell up to 28% of its shares.
Peter Thiel plans to sell as much as 50% of his stake.
Goldman Sachs will also sell as much as 50%, up from 23% previously.
DST Global and Mail.ru will dump up to 40% of their shares, up from 23% previously.
Tiger Global will sell up to 50% of its stake. Previously it planned to sell 7%.

Company insiders aren’t increasing planned share sales. CEO Mark Zuckerberg still plans to sell 6% of his stake. Other Facebook executives like COO Sheryl Sandberg and CFO David Ebersman aren’t selling any shares at all.

And there are other early investors that aren’t increasing their share sales. T. Rowe Price for instance is holding on to what it has. Another interesting wrinkle is the comparison with previous tech IPOs. At Groupon, insiders and early investors didn’t sell any of their stake in its IPO. LinkedIn’s IPO similarly saw very little selling. At Zynga, insiders and early investors sold just 7% of their stakes on average. Early investors know Facebook as intimately as anyone. That they are selling so much of their stakes should discourage public investors from chasing the stock when it opens.

One can argue that Olde New York Establishment is a bit fuddy duddy whn it comes to the New New Things, but principals bailing out of their own company shares at IPO time is not a good sign in any market. The MIT Review (Boston) is even more to the point:

Farhad Manjoo has pointed out that for Facebook to maintain its share price, it needs to figure out how to increase its revenue by a factor of ten. Going from $5 per user per year in advertising revenue to $50 per user per year is about as likely as Facebook going from 1 billion users to 10 billion, which I suppose is the other way the company could increase revenue proportionally, even if it requires an alternate Earth's worth of additional human beings.

So! Either this IPO is, as the Wall Street Journal has suggested, the biggest shell game in the history of stock offerings, pushed along by those who want to cash out their shares in the company at the expense of unsophisticated investors who are piling on, or Facebook has a plan.

The MIT review thinks facebook doesn't have a plan, but their only way out of such an Overvaluation Impasse is to become a bank:

Forget Square, the credit card processing dongle for mobile devices produced by a company headed by Twitter alum Jack Dorsey. What the payments industry needs is a fast follower with serious reach and the desire to vanquish every other player in this space.

Or, as Dan Hon, interactive creative director at Wieden and Kennedy recently told me, "It would be really interesting if Facebook launched a credit card. In fact, it would be terrifying."

Hmmm..they could almost be honorary Londoners .

And then you go over to the West Coast, where excitement is palpable. If New York is going "hang on", San Fran is going "Paaaarty" This is what its all about, the biggest IPO since Google, a megaboost for the Great Startup Dream. A quick visit to Techmeme shows all the usual crowd are like totally boosting up, ready for blast off - TechCrunch is waxing lyrical about overnight sleepathon hackathons, and how they are Big in Brazil and Bangkok, that Eduardo is a bad lad, and how the Big Bad Government is a fly in the future ointment. Nary an economic analysis in sight. GigaOm is hopefully pointing to where the Missing Ad Billions may come from, others say there will never be another deal again like Facebook for the small investor,

Venturebeat is singing the praises:

This week, Facebook’s IPO will be the largest venture-backed IPO of all time, and not in the subjective Kanye West sense. If, as expected, the company’s valuation creeps toward $104 billion, it would be four times larger than Google’s 2004 IPO.

Facebook will also have earned the distinction of raising the most venture capital of any venture-backed company in the U.S. — a grand total of $2.2 billion from some of the biggest names in venture capital around the world. This is almost double the amount raised by the second-place company in this category, Clearwire, a wireless broadband service provider that raised $1.2 billion. It’s also exactly double the amount Twitter has raised to date, $1.1 billion.

Also, Facebook breaks the record for most companies acquired pre-IPO. To date, Facebook has bought 13 other startups, only two more than Twitter, which is the second-most acquisitive company that is still privately held.

I guess what you think of it all depends on where you are sitting. My concern is more "who is over-buying", given that the smart money is either very sceptical or bailing out. My cynical side (yes, dear reader, it exists) suspects its the dumb money in the main (that's your and my pension funds, by the way....)

But for the Bubble-Watching Analyst in me, it is a fascinating tale.

Fred Wilson on the changing nature of Venture Capitalism - GigaOm:

Firstly, it doesn't make money any more:

Wilson said that since the mid-1990s institutional investors have poured $30 billion into the venture capitalist business every year, but venture capitalists have only been able to figure out how to generate good returns on half of it. (Actually, venture capitalists haven’t seen that much money flowing in since 2007, according to the National Venture Capital Association, which notes the recession dramatically lowered investment.)

“There’s two times as much capital in the venture capital business today than we, the professional investors who make up the venture business, can actually put to work intelligently,” he said. As an asset class, venture capital has not beat the public markets on a consistent basis since the mid-1990s, he added.

Secondly, new money is coming in from new sources (I suspect this may be the cause of the above problem):

In the past five years, the amount of angel investment has grown fivefold and more international funding is also entering the startup sector, particularly from Russia and the Middle East, Wilson said. The growth of crowdfunding (made possible by the recently-passed JOBS Act) will further flood the startup market with new capital. If every American family gave just one percent of their investable assets to crowdfunding, he said, $300 billion – or ten times the current amount invested in the sector – would come barreling into venture capital. (That seems to be a pretty big assumption but, regardless, the point is well taken: crowdfunding stands to dump a huge amount of new money into startups.)

Fred's view of where VC is going are:

(i) Given all the new pools of funding, he said, it doesn’t make sense for VCs to continue aggregating capital. And considering the industry’s inability to generate returns on more than half of the current investment in venture capital, he added that the allocation aspect is another area ripe for rethinking.

(ii) Still, he continued, VCs, can keep on adding value as board members, advisors and resources on exits and governance.

(iii) Going forward, VCs have a few options on the table, including becoming more selective, shrinking, halting investment of instutional capital or taking more equity for the governance and advisor services they provide, Wilson said.

(iv) But one of the more compelling ideas he floated was building a business on top of crowdfunding.

“If these crowdfunding markets really do develop into these vibrant markets… maybe the answer is to leverage that capital and do something interesting there as opposed to going out and raising money from the institutions,” he said....And, as a last resort? Quipped Wilson, “We can just retire.”

Only those that were in it before 2000 can retire comfortably by the looks of it though

In his own blog, Fred notes his talk was picked up wrongly as the "death of VC"

I can assure you I never said anything about the "death of the venture capital business" in my talk. The venture capital business is not dying.

My talk was a rumination on the forces at work on the venture capital business today and the changes that may be required to remain relevant and profitable in this new world. The talk was provocative and "out there" but it was not a eulogy.

Defitely not the death. More the circle of life....seems to me that rather than a paradigm shift in VC, another very plausible explanation is that too much new money is flooding in chasing too few opportunities - in other words what we are seeing is good old Bubble behaviour as people start to become irrationaly exuberant again. Then we will have a bubble, then a burst, then it will all flood out again.

That new startups do not need the same funding as the olde style ones is a truism - but all that has done in the last few years is increase the number of boot-strapping startups in the primordial soup. You can't seem to move these days without tripping over another newly set up incubator (more shades of 1997....).

Update - just saw this from Fred Destin on Kernel - Europe is playing out differently:

European venture capital is out of favour with LPs. Even the word seems toxic: I know of one fund who dropped “venture” entirely from its pitch, focusing its messaging on “growth capital for technology companies”. Struggling venture capitalists have to first convince hesitant investors that Europe is a good place to put their cash before they can talk about the relative merits of their particular fund. It’s tough when you have to evangelise your region before you can even get into your own story.

Ironically, the best new initiatives end up relying on public money. The wonderful Passion Capital initiative is one such example. The European Investment Fund (EIF) is seen as the great white hope anchor investor you need to get. (I used the word “ironically” because during the Great Internet Bubble the EIF stood behind a gazillion regional fund alternatives, most of which produced disastrous results.)

In this case it's governments rushing in while Angels fear to tread

Facebook has bought Instagram for $1bn, not bad for an iPhone mobile photo site with c 30 million users. Is it worth the money? Hell no, its not worth a tenth of it, so what is interesting therefore is why Facebook bought it, and why now. GigaOm's view is that it's to knock out a potential competitor, I think this is part of the truth but not the whole truth, as it were. But it points to the reason - the Facebook IPO.

Facebook has about 1 bn users, that is about 50% of all the current PC using internet population globally, so, into and after the IPO, where will growth come from? The other billion? Maybe, but in general those in the countries where it already exists have got it if they want it, and those who do want it but can't afford it are too economically uninteresting from an Ad-serving point of view. So the Great Leap Forward will come from mobile, and no doubt its baked into the business plan for IPO and onwards.

But, we also hear the rumours that Facebook's own mobile picture sharing service has not been setting the world alight, so they needed something better, and Instagram was that Something Better. They had to do a deal, or else the IPO Biz Plan Story was at risk, and in the Bubbletime, the timing and pricing of the IPO is all. $1bn is shocking for such a small company, but not if its seen as a core of a $100bn story, and if it can be done mainly in stock (I still don't Know the % of stock but would assume its the majority of the deal consideration)

That is the Demand side logic. Even so, $1bn?

So we need to look at the Supply side - is there anything else? Apart from a (limited) choice there is a fascinating funding story, as GigaOm reports:

A few days ago it was rumored to be valued at $500 million. A few months ago it was $300 million. Its last round — just a year ago – valued the company at $100 million. The rising valuation of the company was reflective of the growing audience it has been garnering, despite being just on the iPhone. It had reached nearly 30 million registered users before it launched an Android app, a turbo-charging event for the company.

Sounds to me there were some very savvy investors in this company, a view which is reinforced by the rumours that the last round was closed just before the sale:

Because the rumors are true, right before its billion dollar acquisition from Facebook, Instagram closed a $50 million Series B round from Sequoia, Josh Kushner’s Thrive Capital, Greylock and Benchmark at a $500 million valuation. The round was led by Sequoia, as first reported by AllThingsD’s Liz Gannes.

This is Silicon Valley remember, so you have to assume the people in the know (and I class most of Instagram's investors in that group), knew that Facebook needed to buy (or at least was able to make some shrewd guesses) and priced - and timed - a rare asset investment (and sale) accordingly. Facebook then has to top that new valuation, and then some to make it interesting - and Voila! - $1bn

So Facebook overpays, but gets its 100x more valuable IPO underwritten. As to the Founders staying with the company, I wonder how long their earnout period is. As an old boss of mine once observed, when you have several hundred million dollars in your pocket, Miami starts to beckon...

According to the NYT, "CNN, a unit of Time Warner, and the social news Web site Mashable are in advanced talks that may lead to an acquisition of the site, three people briefed on the talks said." The price being talked about today is $200m. Given that Techcrunch, a bigger and better known site sold to the Huffington Post for between $25 - $40m, this would appear to be (at least) a 10-fold incresae in valuation per eyebal (sorry, "unique" in modern parlance) in a year or so. Mashable gets about 20m hits a month, say 250m a year, that price values each "hit" at about $0.1 (assuming a 5 year revenue based NPV, S curve 75% curve, and a c 20% IRR) which is very, very high compared to current cashflows (think 1/100th of that maybe as a "real" value per hit)

There are only 2 explanations for this:

(i) There is a zero too many in the report (and even then I'm surprised at the price)

(ii) CNN has got totally rat-arsed drunk on extra-bubbly Social Media kool-aid (not unknown, look at Time Warner/AOL at the height of the last Silly Season)

Good for Pete Cashmore, the founder - but they could buy all of Mashable's 40-odd bloggers for 100+ years for that price. Even Henry Blodgett thinks its only worth c $40m!

CNN could usefully also look at the lessons from most previous Blogquisitions, by and large they have all lost spectacular amounts of value for the acquirer, especially once the Founding Father goes or loses focus, and given that Mashable has a good sideline in republishing lightly repurposing Other People's Content, with something finally deep pocketed to go after, life could get even more interesting for CNN.....

But to me, whether it is a rumour (in the frothy atmosphere of SXSW, more than possible but I'd bet there are talks....) or not, it's evidence we are in BubbleWorld, in that surprisingly few of the articles I've read about it - many from mainstream organs with "serious" tech journalists - are gasping at the price, in fact many don't even question it.....and yet the real evidence is all these sites are selling out, so if anything the industry is no longer seen as value creating, so one assumes quite a few of the others are unofficially for sale.

A smaller engine plus CNN's distribution channels would be a far better buy in my view. But I guess when (if) Mashable now sells for $50 or something, everyone will see its so much less that $200m that they will think its fine.

By the way, at that price, pro-rata-ing the relative traffic levels, Broadstuff will be selling next week and I am retiring to my Greek Island.....

The What

I gave a talk at the Design Of Understanding conference few weeks ago about technology prediction, a part of which was about the role of hype and bubbles in technology, been meaning to write it up, but this is it in a nutshell.

Bubbles are the last stage in the Creative Destruction cycle as one technology overtakes another.

This sequence is quite well described by Carlota Perez (see slide above)

In essence, the new is always suspect and the old has all the big battalions on its side to prevent the new succeeding. Machavelli recognised this a long time ago when he wrote:

“There is nothing more difficult to take in hand, more perilous to conduct, or more uncertain in its success, than to take the lead in the introduction of a new order of things.

For the reformer has enemies in all those who profit by the old order, and only lukewarm defenders in all those who would profit by the new order, this lukewarmness arising partly from fear of their adversaries … and partly from the incredulity of mankind, who do not truly believe in anything new until they have had actual experience of it.”

The Why

For the Best New to emerge, there is a period of Darwinian evolution as all the new new things compete to get over The Chasm and establish themselves in the market. In technology, the very disruptive new things can often asymmetrically hurt the business models of the Old (ie the small newcomer can afford to undercut the existing behemoths for a while), and this is of course exploited (in what we call "Pirate World" )

But the Pirate World in itself is not enough to shake the Old, which has many advantages - cashflow, and typically recourse to other blocking forces like political access and regulation, and besides has the resistance of the late adopters and the reluctance of the lukewarm supporters of the new on its side. Also, the New often needs complementary infrastructure and other parts of its own value delivery chain to be built, plus money to bribe persuade the reluctant mass market to buy early.

The How

The role of the Bubble is to give the New Things a sufficiently large amount of fast, cheap money (as in you know most of it will be worth nothing) - a Tsunami of Cash - to wash the foundations of the Old away. The role of Hype is to stoke the Bubble, so that the Wisdom of Crowds is converted via Irrational Exuberance into the Madness of Crowds.

Perez's view is that the bubble then leads to a "Golden Age" when the services can be built out in relative calm, on massively discounted assets (eg the huge amount of pipe, power, port and ping left over by the dotcom crash). My observation is that the creation of the new involves the destruction of the old, but also carries significant collateral damage - the destruction of the Irrational Investors' wealth (or not, if you are a bank and too big to fail) which means not all new agers will see it as Golden.

The So What.

In my view, the Facebook IPO is the final act of the Hype cycle of the coming Social Media bubble. Just make sure, in your Irrational Exuberanace, that you are not one of those creatively destroyed in this last part of the cycle.

Incidentally, for the Dinosaurs, Riepl's law shows that the Old do not die, they gradually fade away....

A very useful update comment:

I found Fred Wilson interviewed Carota Perez at Web 2.0 Expo last year, and this copy of her presentation at Web Expo 2.0. Soem of what i mention here she talls about. Cracking stuff, though I'm not sure about her synthesis of the latest financial bubble burst.....