Back in 1999, any tech-savvy entrepreneur with an idea could drum up millions of dollars of venture capitalist funding. The business plans were simple: offer their products and services for free in an attempt to gain market share, then use their critical mass and brand awareness as a tool to figure out how to make money.
Sound familiar? It should, because that’s the business plan right now of just about every company involved in the social networking craze.
When the dot-com bubble burst in 2000, the chain reaction drove nearly every internet start-up out of business, leaving companies like Google, Amazon.com, and Ebay among the few survivors. The majority of Silicon Valley’s overnight paper millionaires were humbled as their shares of stock became relatively worthless. Ten years may be an eternity in the land of internet memes, but financial statements tend to have better memories. So with the lessons of the past still fresh in their minds, you have to wonder what investors are thinking when valuing Zynga at 10 billion dollars, what Facebook is thinking when it bought Instagram for a billion dollars, and what Wall Street is thinking when an upcoming IPO is set to once again make paper millionaires (and billionaires) out of Facebook employees.
Have any lessons been learned from the past? If so, they seemed to have been forgotten in the wake of Facebook’s breakout success. Much like how the popularity of World of Warcraft drove every game publisher to try to make an MMO, Facebook’s critical mass has convinced a lot of tech-minded entrepreneurs that social media is the next big thing. Enter Zynga, Twitter, Google Plus, Pinterest, Instagram… the list goes on. While you can in some way call all of the previously mentioned companies successful, none of them are showing signs of long-term profitability or even viability. Pinterest in particular doesn’t even have a clue how to make money, and yet the venture capitalists are all fighting each other for the chance to throw money at it.
We’re in another dot-com bubble, and like all bubbles they eventually burst. When this one does, the damage could be even worse in the fragile state of the global economy. Don’t say you didn’t see it coming.