A lot of opinions are being generated over the delay of the Groupon IPO. Many are becoming bearish on Groupon, and many are becoming bearish on the future of social media or at least the valuations of social media companies.
I think it’s a bunch of whistling in the woods. Social media is in its infancy. There aren’t even decent metrics to measure a lot of the statistics we have from the introduction of social media, so it’s awfully hard to have an opinion on whether this is frothy, or understated.
One thing we do know. There is something there and it’s big.
I have a different perspective from a lot of people because of my age. You don’t become bald without a little experience. I also look at things a lot differently because of my lifelong occupation, trading.
For those of you who don’t know, I have traded my own money for over 20 years. I never had a customer, a limited partner or anything else. When I placed a trade and put my hands on the chopping block it was my personal family’s money. I never had a trust fund or a family wealth safety net. It gives me a far different perspective on marketplaces than someone trading other people’s money.
Groupon or Zynga are not like the techs of the late 1990's. They actually generate revenue. Both are dealing with growing pains that come from the natural successful evolution from a start up business transitioning to a larger entity. Since they have filed for IPOs, instead of getting scrutiny from amateur analysts, the real pros on Wall Street are digging into their business models. Real pros don’t just opine, they ask tough questions.
Some valuations have gotten frothy. It’s just a case of too many dollars chasing too few businesses. Smart investors filter out the noise and look at the metrics they always have to decide how to value a company. In the start up world, much of it depends on how much you believe in the management team.
With regard to Zynga, their business is heavily dependent on Facebook. That’s not necessarily a positive or negative, but when you commit investment capital you need to have both eyes open going in. The other negative to the business is that they constantly have to be creative to engage their user base. That costs Zynga working capital dollars that they consistently have to generate and plow back in the business. It also means the people that work there are on a constant creativity treadmill. However, based on a Wall Street Journal article I read over the past week end, they are really innovative in using data to determine what they do. While the easy money seems to have been made in Zynga, I like the company, because I like the management.