December 12, 2007
Bubble 2.0: Wall Street keeps its head
All the discussion about whether or not internet financing is in the middle of another bubble period tends to miss one very important point. Wall Street has not shown much sign of internet excess yet - and with the stock market swinging wildly this week, public market investors are showing no inclination to jump in.
A case in point on Wednesday: the withdrawl of an IPO for social networking company Classmates Media. This is a company assembled through a series of acquisitions over the last three years by United Online. Having welded together social networking site Classmates, online loyalty marketing company MyPoints and a couple of other ventures for a total of $200m, UOL hoped to turn around and sell a small slice of the venture to the public, netting more than $100m in cash and putting a heady valuation on the unit of some $720m.
If Classmates’ track record wasn’t enough to put you off - profits of just $1.7m on revenues of $140m in the first nine months of this year - there were several other red flags. The social networking site earned a "significant portion" of its advertising revenues from a deal that expired last month, and even if it finds a replacement for this it warned that any new arrangement is likely to produce less money. The site’s other main source of income, selling subscriptions, has come under the scrutiny of Federal regulators in the US, who don’t seem happy with its practice of automatically renewing memberships (and charging credit cards) each year. For good measure, there’s also a risk that its email marketing practices - the source of most of its user activity - could fall foul of US anti-spam regulations.
None of this might have mattered much back at the end of the 1990s. In the current climate, UOL has just pulled the offer because of what it called "general market conditions."
Silicon Valley is still trying to party like it’s 1999. But unless Wall Street joins in, the alcohol is likely to run out sooner rather than later.
