Venture capital funding for Internet startups reached a new frenzy in Q2 2011. More than $2.3 billion poured into tech ventures, particularly social media companies, reports Mercury News, citing figures from the National Venture Capital Association.
But two recent surveys of venture capital managers and investment bankers show that they are increasingly worried that social media investments are becoming too frothy, and that we could be headed for another tech crash like the dot.com downturn.
“Those of us who lived through the dot-com bust are very leery about investing in social at these valuations,” said Paul Santinelli, a venture capitalist at North Bridge Venture Partners, in the article.
LinkedIn, for instance, had one of the biggest Silicon Valley IPOs in May. But even though revenues have beaten analysts’ projections since then, the stock has plummeted 13 percent. This had led two of the three firms that underwrote LinkedIn’s IPO to actually downgrade the stock, saying revenue growth can’t possibly keep up with such a steadily increasing stock valuation.
But there are others who dismiss the fears, saying that today’s new Internet startups have one big difference from the dot.com days. Namely, revenues and earnings. And that the high-flying IPOs today are simply being rewarded for that.
Mark Heesen, head of the National Venture Capital Association, agrees. He says the problem isn’t too much investment in social media startups, but not enough cash to invest. “The venture capital industry has been investing significantly more dollars into companies than it has been raising from institutional investors,” Heesen said.
One could qualify all this as cautious optimism. The latest Venture Capitalist Index report conducted by University of San Francisco business professor Mark Cannice shows a significant decline in confidence among Bay Area venture capitalists. “”2011 will be remembered as the year that everyone went nuts and overpaid,” Cannice said.
What about you? Do you think the valuations on some of the latest social media plays are realistic? Add your comments below.
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