One thing is certain in today’s economic climate, internet traffic and users’ means instant and now often over valuation. It is said those who ignore history and do not learn from it are destined to repeat it. This picture of over-valuation for tech companies has started to repeat itself.
How is it that tech companies are devoid of following traditional economic valuation for companies? What sets, them apart? Bankers, VC’s and angel investors seem to have a blind spot as to how tech companies are worth way over market value. Seems that when the tech bubble crashed the first when internet start-ups were all the rage and no real way of making income they were given substantial funding although they had no real income stream. The money gained from loans and investors was used for working capital and day to day operations and not having a real income stream or even a plan for different revenue streams.
Just because something is a good idea does not mean there is a way to make money from it. Unless you are innovative and can create a revenue model to support growth and sustain your company through organic means or through funding to innovate and grow only, not to run your business day to day, this seems to be what the new wave of tech companies are looking to repeat.
Analysts are quick to devalue companies on not meeting earning expectations when they fall short but how do they justify and convert hype to initial company value. Case in point, Facebook although they have the user base and has actually made some money for posted earnings is their company worth the estimated IPO and value that is placed on Facebook? Not only will Facebook have to sustain and increase revenue but can it grow at the same rate on which the evaluation is based? Other industry sectors do not have this type of flexibility other than tech. Google and Apple are a few of the tech companies to succeed and worth somewhat what they are valued at due to the sustainability and their ability to increase revenues consistently. Facebook has not proved that it can continue to grow at its current pace while increasing their customer base and rapidly continuing to capitalize and grow revenues.
Recent tech IPO’s such as Groupon’s have proved that companies that have users do not necessarily translate to success. The model of freemium software models popping up from enterprise software to social to CRM to project management how do they make money? Some of these companies upsell additional services to make money but is that quick enough to sustain operations or to recoup the large investment made for it being freemium software?
It seems that if you are Tech Company you may be subject to false valuation numbers which may not be bad if you are the company receiving the valuation. It seems that the principle of making profit from your company has been clouded by the second generation of the tech bubble as investors get caught up in hype rather than actual results. In the Dragon’s Den and Shark Tank the investors (the sharks) do not invest if a company does not have revenues. Seems to me if they do not put their own money on the line should tell you something about company valuation.
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