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Are Startups A Fad?

Are Startups A Fad?

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Tumblr went for $1.1 billion to Yahoo. Instagram went for $1 billion in cash and stock to Facebook. Waze managed to nab £1.03 billion from Google. Yammer went for £1.2 billion in cash to Microsoft. So, the question is, are these startups worth the billion dollar price tag?

Is another bubble about to burst?

While the nineties dot-com bubble has long since been and gone, there appears to be a feeling of this ‘bubble’ in the air. However, with the initial public offering of Facebook (Zuckerberg’s golden startup) last year and the subsequent slide of Facebook’s share prices, it may be fair to say that we’re currently not within the ‘bubble’ territory. Instagram, Facebook’s largest acquisition to date, has 100 million users sharing 40 million photos per day, but where’s the revenue?

Are startups a fad or a new way of business?

The move by Instagram in December to change the terms of use to make a user’s photos available to advertisers without compensation was met with a pitchfork wielding mentality across the Internet. Instagram hopes advertising through the platform is where its revenue is going to be made. Its in it for the long game, and it’s one that Facebook hopes will pay off – especially as the “cool” factor of Facebook begins to tumble.

Only time will tell if Instagram can find a revenue model that fits. Vine, acquired by Twitter in 2012, beat Instagram to the video game – although that’s quickly changed with Vine’s 6-second video clips being usurped by 15-second clips on Instagram. And, with numbers of Vine users dropping off, brands may be excited about the potential, but keeping the user’s from moving to rival platforms is becoming a difficult task.

Advertising And “Big Data”

The data that is generated from startups is where the advertising opportunities lie. From purchasing through pins on Pinterest to the location tracking and subsequent deal offers of Foursquare, startups give a free service to the users in exchange for their personal data. Contextual advertising driven from the explosion of “big data” is where the revenue lies, but the ability for advertising to alienate the user base can cause an exodus, something no fledgling startup wants.

Investment And Bankruptcy

Raising rounds of venture capital can lead to an overvaluation of what the company can be worth, with revenues being stagnant and with a round of venture capital being the only thing keeping a startup from bankruptcy. A revenue stream isn’t needed if VC’s invest a few million in a fresh round of venture capital funding.

Case in point is Tumblr, with a source familiar to the business claiming revenue was less than $5 million in 2012. However, Tumblr claimed revenue of $13 million coming from over 18 billion page views, proving that just because something is popular doesn’t mean it makes any revenue.

Acquisitions by a large player in the tech industry is the saving card for startups’ if the money from the venture capitalists begins to dry up. Companies like Google, Yahoo, and Microsoft have some serious amounts of money ready to be used for the acquisition of startups’ they can see benefiting their own company.

Waze was a good example of this. The Israeli social navigation startup was bought by Google to tie into their own navigation platform. However, with the Waze acquisition, there was also some investigation by the U.S. Federal Trade Commission due to it possibly violating anti-trust laws.

When an acquisition like Waze occurs, the venture capitalists see a return on their investment raised from rounds of funding. If the startup being acquired is planning to be merged into a current product, like Waze, the company can see real progress in that area. However, if the acquisition is to refresh the brand, such as the Tumblr acquisition by Yahoo, then the lack of revenue can make for a large gamble into whether it’s truly worth the cost.

Historical Startup Failures

Yahoo’s recent acquisition of Tumblr for $1.1 billion is not an inch near what they were capable of during the 90’s dot com bubble. In April 1999, Yahoo purchased Broadcast.com for a staggering $5.7 billion at the peak of the dot-com bubble. It was then later shut down, and now Broadcast.com redirects to Yahoo – an incredibly expensive redirect.

Another one of Yahoo’s incredible acquisitions was of GeoCities, bought for $3.57 billion in stock, which was shut down in 2009  and is only available in Japan. While these are some of the biggest acquisition failures, the rate of startup failure also comes into play with investors losing money if a startup falls into bankruptcy.

The Billion Dollar Question

So, where does this take us next? Will we see a $2 billion acquisition shortly? Only time will tell, perhaps we’re at the beginning of the bubble curve, or perhaps we’re just currently in the calm before the storm – no-one can predict where and how the market will move especially in the fast moving space of technology. Perhaps the Internet of Things will see some very large acquisitions in the years ahead. Perhaps Yahoo’s tide will turn and we’ll see the triumphant return, maybe we’ll see a decline in Google and the return of the PC, something Microsoft may welcome with open arms.

Photo Credit: Shutterstock

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Alexa Garthwaite This post was written by Alexa Garthwaite, Business Development Manager at Executive Offices.