Reactions to Fred Wilson’s Post on Liquidity – We Have a Price Gap

I enjoyed reading Fred Wilson’s post on how the VC market needs more liquidity options for consumer Internet companies. As much as I enjoyed the post, I really enjoyed the comments even more.

I applaud Fred for taking a different view and being honest about what a lot of venture investors must be thinking privately. There must be a segment of VCs out there who are asking themselves the following question:

What do I do with a portfolio of consumer Internet companies that are growing quickly in terms of users, pageviews, and engagement if the buyers aren’t buying and the companies can’t go public?

This is, I think, the question of the day. Imagine a spectrum with YouTube and Facebook on one end and an awful, ill-conceived web application on the other end. If you’re on either end, the answer is clear. The really poor applications will die quietly (or live on in anonymity) and the hottest properties with broad, mainstream appeal will always get interest from potential buyers.

Most of the companies out there, in particular products and services that I use and enjoy, are in the uncomfortable middle. They’re large enough that they have a demonstrated audience. They might even be dominant in their niche in the web 2.0 world. But they’re not huge companies yet and they might never be – the audience for what they’re doing might not be large enough to warrant a “go big” strategy at all.

It is true that many of the largest potential exit opportunities (Google, Microsoft, Yahoo, etc) are not as aggressively buying companies today as they have in the past (or at least it feels that way). But why should they be, especially at the valuations that many companies are beginning to achieve? If there’s no threat that the companies in question will go public and none of them are really ramping like a YouTube or Facebook, what’s the impetus to buy now? I’d argue that most of the large Internet buyers simply don’t feel any pressure or need to buy companies right now.

I don’t believe it has anything to do with post-acquisition integration success or failure. Sometimes companies get bought because the buying company likes the product and the team. Sometimes it happens because the buyer likes the team and would frankly rather redeploy that team on some other project where they feel the new team can infuse some start-up pixie dust and make things work better. Seeing acquired products “die on the vine” is sometimes intentional and sometimes due to poor execution – and most companies don’t feel compelled to follow up on what happens post-acquisition for smallish tuck-in acquisitions.

I think this is really simple – buyers and sellers are way apart on price right now. It’s not that there aren’t attractive community sites and properties out there that would make sense as part of a larger organization – there just isn’t broad agreement on what they’re worth. Bridging that gap is going to require that sellers grow into their valuations or buyers redefine what strikes them as fair prices. Maybe I’m being naive, but I don’t really think it’s any more complicated than that.

And right now I think buyers hold the upper hand. And it’s likely to stay that way until some of the emerging star companies either get on a path toward building bigger businesses or the valuation gap closes. Many consumer Internet companies are finding ways to achieve “lifestyle” run rates (and nice lifestyles at that) but aren’t (yet) showing a path to revenues that make an IPO conversation feasible.

Disqus at your leisure in the comments section below.

  • stevenloi

    Nice to see you added the Disqus system now, Charles. 🙂

    I liked the idea of having a private market from Fred's blog/disqus-sions. No matter how great these services are, the market is a little over saturated with great products. Seemingly it is a “buyer's market” because the big boys doesn't need all those services quite yet. I think we've satisfied many of the “mass audiences” need/wants online (so folks outside of Silicon Valley and not working at Facebook/Google/Yelp/etc.) The mass audience for goodness sake still are figuring out what the hell is Twitter and why it's important. What Tumblr is and what the hell happened to Xanga. They are wondering why the hell they see so many damn updates in their Facebook newsfeed with redundant postings of the same message – first by twitter, then by friendfeed, finally by socialthing!. In short, in order for this web market to move for investors, the mass public needs to be educated and adopt the product as well. They need to catch up with the current technologies available.

    Or else, we (being the web entrepreneurs) and others (investors, web/tech. industry) are creating our own bubble.

  • Steven,

    Very good pints on your comment above. I do think part of the issue is that companies are beginning to achieve valuations that can only be justified if they “break out” and become more mainstream overall. As popular as Twitter is, it has around 1 million or two users – that's hardly huge in Internet terms.

  • secondmidnite

    I think I would have put YouTube just left of the middle (on the side of “acquirable”). Although they had huge traffic, their profitability potential was/is questionable. It's not clear what they would have done had Google not bought them at the time.

    Overall, Charles, I think you're touching on the notion that Silicon Valley economics break down at a certain point in an industry's cycle. The VC model always requires a second buyer and always requires a large valuation. The internet no longer requires large capital to gain large scale. So for an internet company to garner a large price requires a significant business model. We just haven't seen one of those in a long time.

    So I think the punch line to your article is that the business models of current “Web 2.0” companies are generally incompatible with the standard VC model.

  • Secondmidnite,

    This is a very nice insight – I do agree that we'll need a new or more effective business model if some of these companies are going to become VC-funded success stories.

  • As popular as Twitter is, it has around 1 million or two users – that's hardly huge in Internet terms. ——————– this is because the mobile internet is not accessible in most third world countries.

  • thanks!

  • I totally agree on this Mate!

  • Hi,
    Thanks for posting the interesting topic .
    Keep up posting good work……………………… : )