Buying into the social bubble
If you saw the media reports that originated in December 2010, you know that Google™ offered Groupon™, a 2-year-old social online group buying company, up to $6 billion to join Google’s list of small business advertising services (Parr, 2010). Even though the deal is off and Google has developed a similar service, a valuation of this size may point to a social business bubble.
The economics of a bubble
According to InvestorWords.com, an online investor’s glossary, a bubble happens when a particular sector’s equity rapidly rises and, like a bubble, prices reach a pinnacle at which they pop and collapse violently.
The most memorable of technology bubbles, the dot-com bubble, occurred in the nineties when technology companies grew seemingly overnight, went public and owners found their stock to be worth millions. It seems as though social companies, like Groupon, are seeing similar circumstances where they are getting high valuations early in their development as a company.
For instance, if the Google-Groupon deal would have gone through, a $6 billion buyout would have meant that Groupon’s value grew more than $20 million a days since it first became a company just over two years ago (Parr, 2010). According to CNBC, Groupon would have been one of the fastest growing companies in history (Melloy, 2010). In comparison, this puts Groupon’s market value in the ranks of 30-year-old plus companies like Whole Foods Market® ($6.23B), Harley-Davidson® ($5.82B), and Royal Caribbean® ($6.07B)(Forbes, 2010).
The impact of a social bubble burst
The lightning-fast growth that social businesses like Groupon have had is unprecedented. That’s why analysts aren’t just studying how the industry’s grown—they’re speculating what will happen if the bubble should burst.
In the dot-com bubble of the nineties, technology companies typically went public early, putting stock market investors at the most risk once the bubble burst. If the social industry is indeed in a market bubble, the industries’ downfall would impact private investors and future startups the most (The Economist, 2010).
Private social companies such as Groupon, Facebook® and Zynga® have all been funded by private investors. Private investors make money when a company they’ve invested in either goes public or is bought by a larger company. The money that these private investors make then goes to fund other startups. So, if these billion-dollar social businesses continue to stand up to pressures from investors and the bubble bursts, not only do private investors stand to lose these massive dividends, the startups of the future would as well.
Standing up to the pressure
In the case of Groupon, reports speculated that the deal fell through because of fears of antitrust litigation against Google that could have put the Groupon deal into limbo for up to a year (Cohn & Dias, 2010). But, another possible reason why social companies like Groupon, Facebook and Zynga remain private is because of their leader’s belief that they are not yet at the point where they should cash out.
All the aforementioned companies believe that there is much more room to grow within the marketplace before the bubble bursts. Even Facebook, which is valued at around $50 billion, has been hesitant to go public as they’ve started to compete and beat the likes of Google, a publicly traded technology company worth more than $150 billion, in many areas (Levy, 2010).
Staying private also keeps these social business owners in control. This allows these social leaders to continue to guide their companies as they see fit, without worrying about pleasing stockholders. As Facebook’s CEO Mark Zuckerberg stated on his own Facebook page, “I tend to think that being private is better for us right now because of some of the big risks we want to take in developing new products." (Tsotsis, 2010)
With social businesses getting larger and more profitable each day, large companies like Google are feeling pressured to compete with social businesses like Groupon and Facebook (Ovide, 2010). But whether these high valuations and high expectations of social businesses can grow beyond Google’s means is anyone’s guess.
What do you think? Should Groupon have taken Google’s offer? And, will Facebook overtake Google? Discuss and share it with your friends and let us know your thoughts on Facebook or Twitter.
References
Chon, G., & Das, A. (2010, December 16). Debunking Google-Groupon: Here’s why the deal fell apart. WSJ Blogs.
Internet start-ups: Another bubble? (n.d.). The Economist.
Melloy, J. (2010, December 1). Groupon may be fastest-growing company ever. CNBC.
Ovide, S. (2010, November 30). Groupon: More anti-Facebook armor for Google. WSJ Blogs.
The global 2000. (2010, April 21). Forbes.com.
What is bubble?. (n.d.). InvestorWords.com.
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