With the announcement that The Social Network has won best picture in the golden globes, there is even more buzz than ever about people who feel like anyone can start a multi-billion dollar business. With reports of Facebook stock trading around a $70 Billion dollar valuation and Groupon preparing an IPO at $15 Billion – these entrepreneurs seem like absolute geniuses. The reality of the situation is however, much different than the media has portrayed.
1. Dumb luck meets opportunity
While I think Mark Zuckerberg is a bright guy (although he comes off very arrogant at times), Facebook would only be a shadow of what it is today without the help of Sean Parker of Napster fame. Sean is one of the driving forces behind subtle things such as changing from TheFacebook to just Facebook; to much larger things like the billion dollar contact list he carries which ultimately got Facebook the funding it needed to continue its upward ramp.
2. We are in a bubble
Being an entrepreneur myself I can sometimes be turned into a cynic instead of just seeing the blind optimism that often infects those built of our breed. I have been guilty of that far too often myself, and while I certainly think that entrepreneurs should be championed, we also need to occasionally step back and see what is going on in the marketplace and understand that bubbles happen and try to counter the inevitable “losses” that will eventually happen.
The kind of valuations that companies are getting right now are absurd, and stories of things such as Groupon attempting to acquire Hipster.com for a sub $10 million range BEFORE IT EVEN LAUNCHES are insanity. While this is fantastic news for companies who bring real value and innovation to the table, by offering them a chance to get the funding they need to keep going it creates a problem for the marketplace as a whole.
High valuations and easy liquidity for companies also means that a lot of stupid and redundant ideas are getting funded. This may not seem bad on the surface, and creates temporary jobs. However, those jobs are not needed and create an artificially good economy when there isn’t enough value to support it. As the cycle of bubbles starts to come down from emotional decisions to decisions based on metrics and returns these companies will get axed, liquidity will dry up and we will be in a tougher place than we started once again.