Another Prick… Is the Bubble Over?
October 14, 2011
Today in the WSJ Tech section is an article titled “Web Start-Ups Hit Cash Crunch” with a tagline below it that reads, “As New Companies Proliferate, Financing Is Drying Up; Some Founders Seek Bridge Loans.”
Who knows what will happen in the future, but if history is any indicator, the run of easy capital for B2C and social media companies may be coming to the end. We saw this phenomenon in the dotcom bubble and it sure looks like we may be seeing it again in the B2C consumer and social media oriented startups rushing to cash in on the models of GroupOn, Facebook, Zynga, and the like.
I wrote a blog recently titled “When the Honeymoon is Over, It’s the Economic Model That Matters“. I discussed how some of the recent high profile companies looking to IPO have had some valuation setbacks and people challenging their business models.
My last sentence in the blog was, “So if you are looking to raise capital, be acquired, or IPO, remember that your economic model will determine how well you do!” The challenge for these late-comers is no different than the Gold Rush; when you stake your claim, if you can’t bring any gold to the general store, they won’t give you any supplies. When you present your business model, if you can’t show how your economic model is better and you have no differentiation, the VC’s will not give you any capital. In a market segment that is already over-crowded and over-funded, this is the way it works.
It should be no surprise to anyone that if there are issues at the high end with late stage B2C and social media companies around valuations that it would not also manifest itself at the low end with early stage companies.
I am curious about your thoughts…
All the best!