The first thing I think when people say, "today's internet growth is just another 2001 bubble" is... "Come on now? You must not know what caused the 2001 bubble burst, because if you did, you wouldn't be making those statements."
In 1998-2001, it was a gold rush to get to the internet because many people had the foresight that it would be the next "TV". Unfortunately, those people had a lot of great ideas and great plans, but the technology infrastructure didn't exist to gain a large audience (customer base). Most entrepreneurs and investors thought internet technology would advance very quickly, so they threw a lot of time and money into companies to be ahead of the curve.
Well, they were all right about their predictions regarding the upward turn of the internet software market, but wrong on the prediction of hardware technology advancements. Even though many Dial-Up subscribers began converting to DSL or Cable between 99' and 2001', it wasn't until 2007, with the launch of the smart phone, WiFi Hot Spots, and the $100 laptop that the subscriber base of high speed internet had reached the point where investors thought it would be in 2001.
After several years of pumping money hand over fist into internet software companies (because the barrier to entry then was very high), many investors began to pull out causing the "bubble" to burst. Here we are 10 years later with more than 2 billion internet users worldwide, of them 700 million on Facebook, with half of them logging on daily using a smart phone and people are calling all of the fast growing companies part of a new "bubble"?
I don't think so. You call Walmart and ask them how long it took them to get 15 million customers and you will find out it took them about 20 painful years verses Groupon who pulled it off in 22 months. The internet and social media has changed everything we knew about business.
Previously, in order to reach millions of customers, you needed store fronts all over the country and were required to advertise in each market. Today, all you need is one online store that sells a great product or service with a few social sharing tools embedded to allow it to go viral. Then, offer special discounts for sharing a particular deal to your address book and let it ride. If your business/product/service is appealing enough, people will share it with their 500 Facebook friends and their 1,000 address book contacts.
What is happening today in the internet space is exactly what investors predicted would happen 10 years ago. This is why internet companies, by the hundreds, are receiving valuations at the seed stage up to and over $100 million, and why IPO's like LinkedIn, and other large private companies such as Facebook are receiving valuations in the tens of billions of dollars.
US online spending in advertising is approaching $50 billion a year, and eCommerce transactions are expected to hit $200 billion this year. Those numbers are only going to continue to grow as the internet population increases within third world countries and as the global population grows in general.
It's no longer a rush to acquire visitors (potential customers), because they are easier to acquire than ever. It's now a rush to build a great online application that mouse traps them, then gives incentives to share it for it to go viral. This is the very reason investors are pumping millions, and even billions, into internet companies that prove early on they can mouse trap on a small scale, because they know with the right online advertising campaigns the application can hit a critical mass that generates hundreds of millions of dollars within months.
Startups are able to receive large valuations and investments even before a product goes to market due to three critical elements; user experience, management experience and viral capacity. If a startup scores in the 90 percentile in each of those categories using an experienced investor's graph, or at least in two of them, that will make the difference between getting funded and not getting funded. If you do get funded, the odds are you will receive a very high valuation because of the potential ROI of your application. Plus, there is a strong need to capitalize the company with as much money as possible so it will never sell itself broke.
Growing too fast is more dangerous than not growing fast enough, because once your online reputation is burnt by the masses, you have to completely re-brand and relaunch your application, doing it all again, or spend millions fixing the negative press. It's always better to do it right the first time, but in the web world, its absolutely critical to manage and prevent terminal risks from the beginning. If you do all of the above effectively, your company is worth the premium valuation because of the high velocity growth potential. This is even more true in the cases like Groupon, that made growth history, and still have a massive market to penetrate.
Every investment is a gamble, but internet businesses have proven to have highest ROI potential in the shortest period of time. This is simply because of the massive market size and the fractional time it takes to grab a large market share compared to a brick and mortar.
2011 Bubble? ...Fiction! (with the exception of a catastrophic event to the planet)
RJ Garbowicz
Co-Founder / Chief Talker
Webtalk Corporation
www.Webtalk.org
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