The first word that popped into mind here at Via Meadia headquarters upon the announcement of Facebook’s eye-popping $1 billion purchase of the photo-sharing company Instagram started with B and rhymed with trouble. Long a Silicon Valley darling for its tasteful design and impressive user base growth, Instagram nevertheless had no income and had announced no strategy for converting eyeballs to dollars when it was bought. How deliciously frothy and light; how gleaming and insubstantial.As the NYT Bits Blog reports, there’s a perverse logic at play here, and it’s the sad norm in the tech sector: no business plan means pesky numbers don’t get in the way of stratospheric valuations when the company is sold.
“It serves the interest of the investors who can come up with whatever valuation they want when there are no revenues,” explained Paul Kedrosky, a venture investor and entrepreneur. “Once there is no revenue, there is no science, and it all just becomes finger in the wind valuations.”When small start-ups I’ve spoken with do make money, they often find it difficult to recruit additional investment because most venture capitalists — and often the entrepreneurs they finance — are not interested in building viable long-term businesses. Rather, they’re interested in pumping up enough hype and valuation to find a quick exit through an acquisition at an eye-popping premium.Getting acquired while producing no revenue is like performing a card trick without the deck of cards: the magician simply explains how magical the trick is, never actually showing it. (And we are supposed to step back in sheer awe.)For start-ups, fewer numbers in the equation mean a projected valuation can be plucked out of thin air.
This all points to deeper problems in the global economy as a whole. The world is awash in excess liquidity, with huge pools of cash around the world restlessly seeking higher returns. And because there don’t seem to be enough promising real investments, we get continual bubbles even as other bubbles, like housing, deflate.When companies like Apple are sitting on a cash hoard of $110 billion (enough to fill 50 Olympic-sized swimming pools with dollar bills) and can’t find a way to make money with it, that’s a sign that the world economy at a basic level is still not back to real health.Bubbles don’t just signal problems in one particular industry, economic sector or country: they are a sign that something much bigger is out of whack.