Technology valuations go up and up

29 Nov 2010

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In his look back on the week that was, Siliconrepublic editor John Kennedy says that rising valuations for technology companies are making him uneasy. Let’s keep momentum but also some perspective.

When the dotcom bubble burst in March 2000 as the penny finally dropped among Wall Street investors that wild valuations for internet companies that had yet to even bring in a cent of revenue were crazy, it was a full two years before the penny dropped in Ireland. Of course, this wasn’t helped by factors such as nervy markets in the aftermath of the tragic events of 9/11 and the fact that the world’s telecommunications industry was in free fall at the time. This not helped by the fact that the industry paid €160bn for 3G licences that weren’t going to be worth anything until 2010.

Neither was any of this helped by the fact there were no smartphones at the time, no one had broadband at the time and quite simply, valuations and share prices had gone off the scale.

Ireland’s reaction, in my opinion, was disproportionate. Not only did we not have any dotcoms to begin with, except some services companies, but out of the 120,000 people employed in ICT at the time, fewer than 10,000 actually lost their jobs and in fact more jobs were created in the years to follow, as companies like Google and eBay opened operations here.

Yet parents and career guidance teachers saw this as sufficient reason to encourage children not to take up computing courses and instead opt for more sensible professions like law and property (yeah, right). The numbers attending computer courses still haven’t recovered despite the fact the ICT industry is still expanding.

Against the odds

It is a source of enormous pride to be able to cover an industry as versatile and innovative as the ICT industry and with every year I am more and more amazed at the impact technology is having on the world at large, from a cultural perspective and from the perspective of how increasingly flat the world is becoming.

It is interesting to see how the technology industry is one of the few sectors of growth left in the global economy and the impact of companies like Google, Zynga, Facebook, Skype and Twitter, not to mention the stalwarts like Microsoft, Dell, HP, IBM and Apple bang out innovation after innovation.

People are still spending on technology and in the corporate world, the arrival of cloud computing and an overall industry PC refresh are helping the industry to maintain a healthy glow.

However, as someone who remembers the dotcom crash of 2000, I have to say I feel nervous when it is being pointed out again and again that valuations are rising for technology companies.

Only last week we reported how Google is in talks to buy Groupon for between US$2bn and US$3bn. The Wall Street Journal reported recently that if Facebook were to IPO in 2011 it would have a market capitalisation of between US$35bn to US$40bn. Tech blogger Robert Scoble recently railed at how he believes Twitter is underhyped and should be worth at least US$10bn.

Silicon Valley law firm Fenwick & West LLC recently conducted a survey of valuations of 100 technology companies.The firm’s Venture Capital Barometer showed a 28pc average price increase for the quarter. This compares to 30pc in the first quarter of 2010 and marks the fifth consecutive quarter in which the barometer was positive.

Who’s right, who’s wrong?

It’s not for me to say if these valuations are correct or achievable. Maybe they are. But as someone who has seen this before, for an industry that is doing so well at the moment, I can’t help but feel nervous as people talk up another bubble.

Then again, the potential for technology has never been greater. The digital economy is a worldwide phenomenon and I wish more Irish companies would make use of the opportunity. The need for broadband has never been greater and next year 50pc of mobile users will be carrying smartphones. Conditions, in fairness, look great.

Yes, it’s true that companies like Amazon.com and Google, which were created in the dotcom era and took years to gain revenues and are now thriving and profitable, show what can be done. Yes, companies like Groupon and Zynga, which are just two years old, are already revenue positive.

However, while companies like Facebook have yet to IPO and while Twitter is still taking on venture capital, let’s keep perspective. It’s all to play for.

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Editor John Kennedy is an award-winning technology journalist.

editorial@siliconrepublic.com