Tons of press, blog posts, tweets, etc., about whether or not we're in a "bubble" in the internet space. Here's my suggestion for a simple test:
- Notwithstanding the LinkedIn IPO, the recent Groupon IPO filing and the widespread rumors about Zynga and the imminent filing of their IPO, the overwhelming majority of internet companies will provide liquidity for their shareholders via an acquisition. Too many structural impediments (e.g., collapse of institutional trading profits, Sarbanes-Oxley, the Spitzer settlement with Wall Street imposing draconion restrictions on sell-side analyst activity, consolidation of the IPO buyer community....) for a robust, industry-reviving resurgence of the IPO.
- Returns for investors, and wealth-creation for founders & employees will come through the difference between the valuation at which the investors, et al., made their investment(s) and the valuation at which the Company gets acquired.
- Accordingly, if the entry valuations are increasing faster than the exit valuations, we're in a bubble. If they aren't, we're not.
- I have only anecdotal data (if anyone has real aggregate data, please comment), but, based on that, I would assert that we are deep in a bubble.