What does Facebook’s $104bn IPO and share price fall mean for the UK’s digital landscape?
Why technology assets will continue to attract investors and corporate buyers with social media leading the way
Don’t expect the bubble enveloping the technology, media and telecoms (TMT) sector to pop just because Facebook’s share price has spiralled downwards since its insanely priced flotation last week.
In the day of trading that followed Facebook’s $104bn IPO last week, around 11% of the company’s value was wiped out. Then yesterday it slide further as investors turned their backs on the stock, with Facebook’s value $19bn on Friday’s IPO high. So much for the honeymoon period for newly hitched founder Mark Zuckerberg, who barely had time to consummate his biggest day in business with more than a few high-fives.
But what does the unravelling of Facebook’s share price mean for digital companies with a leaning towards social media? Unlike the dotcom boom to bust scenario of 2000 online companies have since proved capable of providing enormous returns and generating huge profits.
Back then, Lastminute.com suffered the same ignominy when its much-hyped and massively over-subscribed shares rocketed initially, valuing the company at £571.3m. Two weeks later the share price has plummeted 190 pence and in mid-April £35m was wiped off the London Stock Exchange after the previous day’s collapse of the New York Stock Exchange.
Lastminute founders Martha Lane-Fox and Brent Hoberman became shareholder pariahs, targeted with vitriolic abuse. Going public can cause a painful crash back down to earth. Of course despite the bruising experience, Lastminute survived to tell the tale and showed the investment bankers can get their pricing drastically wrong. In Facebook’s case, eyes are looking accusingly at Morgan Stanley, the investment bank that led the LinkedIn, Zynga and Groupon IPOs last year.
But, if your elevator pitch contains the buzz terms social media, software as a service (SaaS), e-commerce, consumer marketplace, or payments – and you’ve got a something to show for it by way of revenue or users – you’ll probably still have investors and larger corporations tracking your progress.
Facebook’s acquisition of photo-sharing site Instagram for $1bn exemplifies this. Some of the revenue multiples being attached to fledgling businesses continue to seem far-fetched and as Facebook has shown so far, will play with the confidence of backers, yet there is still appetite for more of the same.
Facebook fall not the death knell tech valuations
The enormous, if lower than expected, market capitalisations achieved by Groupon and Zynga – $13bn and $7bn respectively – when they went public at the tail-end of last year, were similarly a little anti-climactic after some of the fanfare that preceded their IPOs. Reservations were publicly voiced then about those companies’ abilities to sustain their growth and deliver the requisite revenues to match expectation. Many doubts still remain.
And we’re seeing a similar response to Facebook’s prospects of achieving what will need to be some 82 times earnings growth, seemingly via an advertising model that has yet to suggest anything like such value. Last year each user generated only $5.11 in revenue for the company. It will need other services to supplement such revenues, particularly via Facebook Credits and its mobile offering. As Facebook admitted: “We do not currently directly generate any meaningful revenue from the use of Facebook mobile products, and our ability to do so successfully is unproven.”
Alex Mifsud, CEO of payments company Ixaris also believes there his huge potential value in Facebook Credits, if it is rolled out to all aspects of e-commerce on the site rather than just social gaming. “With nearly a billion users, Facebook could generate incredible profits from retailers setting up e-shops within the platform where users can pay for real goods with Credits. Facebook Credits could become a single currency used across the world online.”
Nevertheless, all this public market activity is creating an insatiable thirst for more like them, as irrespective of the billions wiped off the value of Zuckerberg’s stake, the fact is that early investors will have walked away will millions or billions in their pockets – and Facebook will have spawned a new generation of bright, rich, über geeks intent on unleashing the next technology supernova.
In recent months we have seen in the social media sector figure prominently in deals sections of every respected business organ. We saw CNN cosying up to hugely influential blogging platform Mashable. Yammer received an $85m injection of capital in a round led by DFJ. A cool $6m of Presidio Ventures’ cash pile went into social media ad firm Fantasy Shopper. And the promise of social media bets secured $15m for investment network eToro.
“Private equity and corporate buyers are lining up to buy social media assets at the moment, and we are seeing a clear effect on pricing,” said Natalie Tydeman, a partner at private equity specialist GMT Communications Partners. “We don’t expect this trend to reverse any time soon, but not every business will be the runaway success that Facebook or Groupon have proved to be. Therefore it is more important than ever that investors in the space know the market, or risk being found out.”
The ripple effect of Facebook’s rise
In the US, Travis Katz, the ex-head of international expansion at MySpace during its peak years, secured around $20m in investment for his Facebook-integrated travel site Gogobot. The backers for the social media-based start-up? Google’s Eric Schmidt and Techcrunch founder Michael Arrington – two of the most well-informed and prominent members of the global tech community – along with Silicon Valley-based venture capital funds Redpoint and Battery Ventures.
It’s indicative of the huge potential for monetisation investors believe is there since Facebook got commercial in pursuit of its big pay-day. There was a time, not all that far back, when even contemplating experimenting with Facebook advertising seemed to be a licence to pour money down the drain, such was the low level of click-through rates. While many still have reservations, including General Motors, which pulled its $10m advertising budget just prior to the IPO, there have been important signs in the last quarter that it exerts evermore influence on some of the 900 million consumers with accounts on the social network.
The average CPM (cost per thousand impressions) rose 41% in the last year and 15% in the first quarter of the year, according to TBG Digital’s Global Facebook Advertising Report. And according to Virginia-based media consultancy BIA/Kesley, social media ad spending will hit $8.3bn in 2015, up from $2.1bn in 2010, so it’s only going in one direction. The social network has matured a little like Google following the introduction of AdWords, although has much much further to go.
Why social’s at the heart of future business
I met with Gogobot’s Travis Katz at London’s Hospital Club and he offered some excellent, if not unexpected, points for why the social aspect has to be high on the agenda of ambitious technology companies in Europe today. “Consumers expect sites to be personalised. They should reflect your personal taste and should be relevant,” he said. For those not yet familiar with it, Gogobot is entirely based on personal connections, who recommend places to visit all over the world, thus helping users plan their travel itinerary knowing that someone they like has tested it for them already.
With ‘old web’ sites such as Trip Advisor so open to abuse by unscrupulous – or ‘entrepreneurial’ – hoteliers and the like penning favourable reviews for themselves, users are likely to feel far more comfortable relying on a bank of intelligence served up by people they know, Katz contends.
We know this. The interesting point to note, however, is that there is a new world order forming, hence the major investor interest now. As Katz said: “There have been very few examples of Web 1.0 companies that have successfully made the transition. The untouchable giants – Yahoo, MSN, AOL, eBay, Google – are really struggling to stay relevant. The first three particularly; eBay is adapting. But even Google is running around with its hair on fire.”
Certainly, the comments made by Google founder Sergey Brin, who expressed concern about privacy with regard to the dominance of Facebook, amused – especially given Google is ploughing huge reserves into making Google+ a serious competitor to Mark Zuckerberg’s offspring.
But hair on fire or not, Google has reinvented, acquired, and swallowed so much whole that it’s not going to suffer the same ignominious decline experienced by some of the companies Katz mentioned. And if there’s even the slightest risk of that happening, it’ll buy the next big thing.
Outlook for London’s Tech City and beyond looks bright
GMT Communications Partners’ Tydeman said there are fewer fast-growth social media plays in Europe and any of those looking to capitalise on operating on the platform had better beware. “I’d be nervous about those that are too dependent on Facebook,” she told me, and added that inevitably there will be some fatalities as hyperbole gives way to reality. Instead, she pointed to a range of other sub-sectors in the TMT space. Consumer internet businesses or marketplaces “where there is a real network effect”, such as property portal Rightmove, offer value. “Anybody who wants to list a property has to use it.”
E-commerce companies too, she said, are achieving high multiples with online cycling paraphernalia retailer Wiggle a great example. And then there are the aforementioned SaaS companies, securing recurring revenues from customers as more and more of us gravitate to cloud computing.
Notion Capital securing $100m at the first close of a $150m fund to invest in cloud-based business-to-business propositions offers clear evidence of wider investor interest – and those with traction already have good money to show for it. In payments, Tydeman points to some of the up-and-coming German and Austrian-founded sites Moneybookers, Paysafe Card, and Wirecard as ones to watch closely.
One would hope that the UK will fit into all this neatly. Last week Yell.com acquired Moonfruit.com for £18m just months after the website design platform added social and mobile commerce features. Online shopping site BagThat, which relies on social network users, secured £2m via Oxford Capital. Tech City-based online marketing company cloud.IQ, which boasts integrated mobile and social media tools, raised £2m in growth capital. And there are many more besides.
Wayra, Telefonica-O2’s high-tech start-up incubator recently received more than 1,000 applications to become part of its London hub and hopes to produce the venture the tech community here is yearning for from its initial 20 incubatees. Tydeman, for one, thinks London has the strongest tech cluster in Europe – and Care.com, which has raised more than $60m for expansion, opened its European HQ here recently, supporting this sense. Skype’s first employee, Estonian Taavet Hinrikus, also selected London for his start-up Transferwise, which recently secured $1.3m from some illustrious investors.
Homegrown ventures Mind Candy, Wonga, and Forward Internet Group will inevitably achieve strong IPOs or trade sales in the next few years. So before we jump too quickly to herald the demise of tech stocks and the ecosystem surrounding Facebook, consider that the bigger picture still suggests a sector in pretty rude health – inflated multiples or not.