It's still too early to tell how this plays out; however, there are signs that suggest investors should proceed with caution.
Take the new term to describe a hot new tech company. Forget start-up or pre-revenue. Instead, try this: pre-product. It carries more cachet.
After all, virtual reality headset company Oculus, a "pre-product" company, just scored a $2 billionhit by selling itself to Facebook last month. Oculus doesn't make any money. That's not a shock, since Oculus doesn't actually sell anything. Nonetheless, Facebook CEO Mark Zuckerberg thought the technology of its prototype game goggles was cool enough to be worth billions.
This comes just weeks after Facebook announced it would pay a staggering $19 billion for the instant-messaging service WhatsApp. It seems Zuckerberg, like many in tech right now, is willing to pay up — at any price — to thwart competition and possibly discover the next big thing.
Why not? For Zuckerberg, spending billions on cool tech finds is far easier than it would be for most CEOs, since he owns the majority of voting shares. What's $19 billion to a guy who's company is worth $165 billion and who's been a billionaire for most of his adult life? For Zuckerberg, it's more critical to be part of the next big thing than to worry about whether he's overpaying by a billion or two.
Understandably, Facebook wants to keep its edge. The company's management knows it was slow to get into mobile, so now it's willing to take chances on companies that position it for the future.
Investors agree and are paying up in huge ways to own a small share of that future. Look at the red hot IPO market. Four months into this year, tech and Internet initial public offerings have raised nearly as much money as they did in all of 2013. We've seen darlings such! as Facebook and Twitter go public at huge valuations. And those valuations keep climbing. Start-ups aren't far behind.
According to data compiled by Bloomberg, Pinterest, a social-networking virtual bookmark company, is worth an estimated $3.8 billion. Payment system Square is worth an estimated $5 billion. Photo- and document-sharing business Dropbox is worth $10 billion, and mobile app car service company Uber, $3.5 billion. Let's not forget instant-messaging service Snapchat, which turned down a multi-billion-dollar offer from Facebook because it wanted to stay independent. Nest, the high-tech household products maker and champion of the "Internet of things," sold for $3 billion to Google earlier this year.
What do all these companies have in common? Simple; most don't make much, if any, money. In a world where growth is all that matters, innovation is more important than earnings, and investors are in a mad dash to grab growth. Valuations keep getting higher and higher.
Last year, the Nasdaq composite index was up 38%, and today, stands at roughly 20% below its all-time high close of 5,048.62 on March 10, 2000. Maybe this time will be different. Let's hope so, because the last time Silicon Valley threw a party like this, it took a long, long time to clean up.
Trish Regan is anchor and editor-at-large for Bloomberg TV.
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