[Sixstrings]

The exuberance has given rise to an elite club of start-ups — all younger than seven years and all worth billions. Successive investments in Twitter have reportedly increased its value 33 percent, to $4 billion, while Zynga, creator of the popular Facebook game FarmVille, is worth more than $5 billion.

Google was willing to pay $6 billon for Groupon, an online coupon company that was valued at $1.35 billion only eight months ago. And Groupon was willing to reject the bid on Friday evening, presumably because it could sell for even more money later.

Less than a decade after the dot-com bust taught Wall Street and Silicon Valley investors that what goes up does not keep going up forever, a growing number of entrepreneurs and a few venture capitalists are beginning to wonder if investments in tech start-ups are headed toward another big bust.

(snip)

They are piling into me-too start-ups that imitate popular Web companies that already received financing. Companies that involve social shopping, mobile photo sharing and new social networking are finding it easy to attract investors because no one wants to miss the next big thing.

Yammer, a system for sending Twitter-like messages inside businesses, recently raised $25 million, while investors reportedly signed a check for close to $30 million for a niche blogging site called Tumblr. GroupMe, a new group messaging app for cellphones, raised $9 million. Path, an iPhone app for sharing only photos on a social network limited to just 50 people, received $2.5 million. Its competitor, Picplz, scored $5 million. And those are just within the last few weeks.

It has some venture capitalists scratching their heads.
http://dealbook.nytimes.com/2010/12/03/a-silicon-bubble-shows-signs-of-reinflating/?hp

Ok, to be fair Zynga has other web games besides "Farmville." But come on.. five BILLION dollars? Really?

[Cog]

You mean the food grown on Farmville isn't real? WTF.

[Questionmark]

I've been thinking about this myself lately. Seems pretty obvious that these buyers will never recoup that money. Facebook had their first profitable year in 2009 and not by much and twitter has yet to find a successful way to monetize their site. Not to mention that all of this money is from ad revenue and not anything productive. It's only a matter of time before the funds dry up and these companies fail. I guess the question is how long can this continue?

[Keith_McClary]

I guess there must be a company that dreams up all those weird/cute names. How many billions is it worth?

[vtsnowedin]

I don't get it. A game you play for free on a site with a few adds nobody reads. Where is the value in it? Considering the amount of time spent playing it when the player should be working it is a total loss to society and should have a negative value. Billions?? HA

[mos6507]

The company I used to work for owned Myspace and sold out to Rupert Murdock for a half a billion dollars. Now Myspace is dangling by a thread waiting to see which direction Caesar's thumb will go. I doubt the site ever made more money than Fox paid for it.

It's really hard to sustain a business long-term on the internet. It's inherently a pump-n-dump factory that makes a small number of millionaires who in turn pass the buck to the last guy who is holding the bag when the fad runs its course.

People still conflate hits with value with websites, but the more hits you get, the more overhead it takes to run the sites. More servers, more bandwidth. It's kind of like an EROEI trap. The value per click is very low so most of the money comes from speculation (stock valuation and selling the company off).

If you look at sites that have made the most money, they are doing it from some ancillary stream. Think paypal/ebay or Amazon. Google runs the ads most people put on their sites so that puts them at the top of the pyramid. But normal free ad-supported sites have a hard time staying above water. That was true 10 years ago when the dot com bubble bust and it's just as much true today, despite faster computers and cheaper bandwidth.

[Outcast_Searcher]

I wonder if folks are willing to bid big on certain companies hoping to hit a jackpot. Take Amazon as an example.

I remember following online discussions on Amazon stock during its first years. I remember folks mocking comments that they didn't know if they should buy a book from Amazon, as it would increase their losses (i.e. they were losing X per book on average in their overall stats).

I remember thinking "It's just another stupid online retailer. There will be a TON of intense competition in their space. How much can the stupid stock be worth?" This was in the late 90's, before the dot-com bust.

Look at Amazon today. The valutation STILL seems ridiculous to me, but at least it's not basically infinity, and the stock has gone up a hell of a lot over time (as has their profits).

So, I wouldn't touch these sky-high gaming software stocks with a ten-foot pole, but perhaps investors have high hopes that THEY will pick the right ones, with memories of wild internet successes like Amazon dancing in their heads?

[mos6507]

Jeff Bezos was heavily criticized for running huge debts with Amazon in the early days. The reason it survived is that it outlived sites like Pets.com. It became the winner by being the last man standing. Now they are synonymous with ecommerce.

The way the internet works is there is room for usually one top dog and maybe one also-ran (think barnes & noble for books or bing vs. google for search) and that's it. You have the top with high burn rates and the small fry with low overhead that find their niche and inbetween there is a ton of sites that crash and burn.

It's the perfect environment for Gordon Gecko types to run companies purely for short-term personal gain rather than to build sustainable companies that can live on indefinitely. The lifecycle of internet business is inherently short because fads come and go and users are very fickle. They dropped friendster for myspace, only to drop myspace for facebook. Facebook in turn is likely to lose out to someone else down the road. They dropped early sites like alta-vista for yahoo, then yahoo for google. That's how it goes. Out with the old, in with the new.

In the housing boom we've largely forgotten the dot com boom that preceded it but it was very similar to the credit crisis in a lot of ways in the mentality of easy-money that pervaded it.

In fact the guy who funded the 2nd dot com I worked at was an arab oil sheik.