Facebook’s IPO is tomorrow. The company’s huge reach and public image have made it one of the biggest offerings of all time with regular people as well as hardened investors looking to get their hands on the shares as soon as they become available. The popularity of the offering is just the biggest symptom, and possibly a huge driver of, what looks like a bubble in the valuation of firm’s that offer web services.
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The absurdity continues as a recent injection of capital has valued Pinterest, an up and coming social network, at $1.5 billion. that is an absurd amount for a firm that has not shown any ability to generate revenue. The company received an injection of $100 million from investors in its latest round of funding.
The valuation is five times higher than than it was after the last round of funding from investors in October 2011. Pinterest is a social networking website that allows users to pin photographs of products they like.
The problem with web services like these is the inability to measure their success properly. The most often quoted statistic about the success of a company is not about its business model or its revenue stream it is a simple user count. There has not yet been any reasonable proof that a company can adequately turn these users into revenue.
Firm’s need to create streams of revenue in order to make money. This basic fact seems to be being lost on investors who are moving in hordes into a risky bet on social network and other internet services. Just because a firm has the ability to reach a billion people doesn’t mean it can sell anything to them. The entire tech company share market has become a bubble.
Facebook will be valued at almost $100 billion if not more when the firm’s shares go on sale. It might triple in value in the next year but that doesn’t mean its a good bet. Groupon was valued at $12 billion at its IPO. Twitter is currently valued at around $10 billion. These companies don’t make enough money to justify those numbers and have several other problems besides.
There is a bubble in Social Media. Customers are ignoring the risks implied in any business and the ones added on because of the new territory being walked here. Nobody has seen a social network build itse;f into a functioning $1 billion dollar company. In 2004 nobody had seen a search company build itself into a functioning $200 billion company but that has happened.
Facebook may very well be one of the most successful companies of all time, so might Pinterest, given some time. Now, however, the firm’s valuation seems to completely ignore is revenue streams and the risks involved in the sector. Social Media is unknown territory. It has a 5 year history and much less than that if we’re talking a real financial industry.
Some of these companies will fail and those failures may be difficult to understand. What killed MySpace, what killed Bebo?