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Yesterday, AllThingsDigital reported that Twitter has raised a huge $200m round of funding lead by top-tier VC firm Kleiner Perkins. The funding round apparently values Twitter at a whopping $3.7bn.

Earlier this month, group buying leader Groupon reportedly turned down a massive acquisition offer from Google. And on an almost weekly basis now, we learn that investors on secondary markets are pushing the value of Facebook pre-IPO stock up; the world's largest social network is, to investors buying shares on the secondary market, now worth approximately $50bn.

The question that's being asked a lot lately: is this a bubble? The answer: it's complicated.

In retrospect, it's easy to identify the first .com bubble. Startups with little operating history and non-existent revenues were going public at a furious pace, in some instances garnering billion-dollar valuations. The rationale: they were pioneers in a 'new economy' that was set to upend trade and industry around the globe, and in turn, they would eventually inherit wealth possessed by the current titans of industry. It didn't take long for everyone to realize, however, that promise isn't always easily turned into profit. Most of these startups, however promising, lacked sustainable business models, and were spending far more money than they could ever hope to make in the near future.

A decade later, however, we are able to look at the .com boom and bust from a slightly different perspective. Many of the startups that flamed out were truly ahead of their time. Pure-play ecommerce investments, for instance, were very hot back in the late 1990s, and today ecommerce is a multi-billion dollar industry. And while a few pure-play retailers, like Amazon, have done very well, we also have brick-and-mortar retailers that have successfully evolved into multi-channel retailers thanks in part to the wonders of e-commerce.

So what to make of today's hottest startups, like Twitter, Groupon and Facebook? Do they constitute a new generation of wildly overhyped and overvalued companies, like their .com predecessors, or is it different this time around?

Quantitatively, there's little doubt that these companies have been given rich valuations. Twitter is generating revenue, but there's no indication that there's enough of it to justify a $3.7bn valuation. Groupon is currently making money hand-over-fist, but it is a narrow moat company that will eventually face many challenges as 'group buying' is commoditized and vendors look more closely at ROI. Facebook has been growing revenue at a healthy clip and is reportedly going to generate approximately $2bn of it this year, but at even a $40bn valuation, the social network would likely have a .com-era P/E ratio.

But we can't value each of these hot startups on a quantitative basis only. There are qualitative factors that need to be looked at. One of the big challenges for startups back in the late 1990s was the fact that despite the rapid growth of the internet at the time, it was still nascent and immature. Today, the internet is far more mature. Twitter may have a steep hill to climb creating a business model to justify a $3.7bn valuation, but there can be no doubt that the type of communications platform it has built is impacting the way consumers and brands interact online. Groupon's long-term success may be questionable, but nobody should forget that the young company has sold billions of dollars worth of local goods and services via the internet. Facebook may risk a big fall once 'the next big thing' hits, but with its 500m users, the company has built one of the biggest web destinations -- ever.

What's more important: the quantitative, or the qualitative? In my opinion, we do have a bubble, but it's not like the .com bubble that formed in the late 1990s. That bubble was fueled by premature and unrealistic expectations about what the internet was capable of at the time, and which business models would win out. Today, investors recognize the importance of the trends that have powered the rise of the Twitters, Groupons and Facebooks of the world. These trends are meaningful and legitimate. But those same investors, tasked with finding ways to play those trends, are probably overpaying for their investments in the companies that have become the poster children for them. In other words, buying pre-IPO Facebook stock at a $50bn valuation might very well prove foolhardy, but it's not because Facebook itself is a pig. What Facebook represents -- a more social web -- is legit.

The good news is that today's bubble isn't likely to produce a carbon copy of yesterday's bust. Retail investors (eg. you, me, grandma, grandpa) aren't (yet?) able to buy shares of TWIT, GPON or BOOK, so the public markets are largely insulated from any risk. It's VCs and accredited investors who stand to lose their shirts. And even then, they will probably keep some of their clothes even if they do overpay. Outside of perhaps Twitter, these companies do have meaningful revenue right now, so we know they're worth something, unlike many of their older .com cousins.

For those of us who aren't scrambling to buy $1m worth of Facebook shares on the secondary market, the best news is that the internet envisioned during the first .com boom is practically here, and it's quite mature in major markets around the world. There are lots and lots of consumers online, viable business models have been established and in many cases, the technology you need to do business on the web is not only robust, but relatively inexpensive. That means one thing: to blow your own bubble, you don't need to buy shares of Twitter, Groupon or Facebook.

Patricio Robles

Published 16 December, 2010 by Patricio Robles

Patricio Robles is a tech reporter at Econsultancy. Follow him on Twitter.

2429 more posts from this author

Comments (5)

Niranjan Sridharan

Niranjan Sridharan, Digital Auditor at ABC

Oh! They most certainly are.

almost 6 years ago

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Tommy Toy

Both Facebook and Twitter's recent valuations just don't make sense to me when you base the values on some multiple of revenues.  

I have always felt that the ad supported revenue model for social networks is busted, and that you cannot rely solely on advertising to achieve profitability. Twitter is just starting to monetize, and the $50 million advertising revenues projected for 2010, do not justify a $3.7 billion valuation. That's a multiple of 66x.  These valuations are built solely on investor hype instead of real world pragmatic logic and reasoning.  Investors are basing their valuations on the number of registered members, Wall posts, no of tweets, as if these huge numbers really mean any thing.

Investors are forgetting that there are huge economic risks.  Unemployment rates remain high, banks aren't lending, the federal government is quite literally bankrupt, America is entering a dangerous period of deflation not seen since the depression, there a distinct possibility of hyper-inflation occurring simultaneously and the number of IPO's are low and the possibility of a successful IPO can be counted on one hand.  

In short, the valuations for many of these digital companies are reminiscent of what occurred during the DotCom Era.  My Theory is this: investor's are deliberately creating hype in anticipate of an IPO.  It's all concocted by the company executives and their boards, investment bankers, and the press. There were no solid or sustainable revenue models upon which to base those valuations, and I see the same thing happening all over again.  It would not shock me at all if there is a second DotCom Bubble.  

almost 6 years ago

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Courtenay Pitcher, Blogger at VernonGirl.com

I think it is a bubble and investors should stay diversified.

almost 6 years ago

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Dundee

It's the same problem that has arisen over the decades with all technological developments. You have technologists inventing things but know little about monetizing and valuing them, and investors trying to judge the likely success of an emerging technology. Of course the investors create hype before they launch, but the incomes streams from social network sites is still brand new. There is not much historical data to base any prediction on, and we all know the financial industry love to look at previous data to predict the future.

almost 6 years ago

Moksh Juneja

Moksh Juneja, Chief Executive Officer at Avignyata Inc.

the bubble will burst in 2012!!

almost 6 years ago

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