LinkedIn and Skype $8B+ Valuations Contrast with Telecom & Networking Start-Ups which Can't Raise Capital

This is an interesting dichotomy. LinkedIn and Skype are $8B+ market cap software companies that have developed popular platforms (Social networking for “business professionals” and VoIP/conferencing) which depend on Internet access for customers. Yet, mature telecom and networking companies that provide the infrastructure (or “plumbing”) for the Internet have depressed stock prices. And more of them (Ericsson, NSN, Alcatel-Lucent) want to diversify away from network equipment to the telecom services business. In the past, cutting-edge telecom/Internet technology and innovation came from telecom/ networking start-up companies. But where are those telecom/networking start-ups now that we need them?

Unfortunately, telecom and networking start-ups almost don’t exist anymore. That’s because VCs don’t want to invest in them. According to the Money Tree Report, prepared by Price Waterhouse Coopers and the National Venture Capital Association (with data from Thomson Reuters), there were only 28 investments worth $142M in telecom start-ups in 1Q11, compared with 39 deals worth $254M one year earlier- 1Q10. For network and equipment companies, the numbers were 15 deals totalling $111M in 1Q11 vs 13 deals worth $238M in 1Q2010. That’s a steep drop in funding of over 50%!

Meanwhile, Internet-specific companies received more than one billion dollars in Q1 2011 with $1.2 billion going into 171 deals in the first quarter, a 19 percent decrease in dollars and an 18 percent decrease in deals from the fourth quarter of 2010 when $1.5 billion went into 208 deals. Internet-Specific is a discrete classification assigned to a company with a business model that is fundamentally dependent on the Internet, regardless of the company’s primary industry category.

The San Jose Mercury 1Q2011 Venture Capital Survey revealed that VCs are targeting their investment in more mature start-ups, rather than newbees. In the first quarter of this year, the average VC investment in fledgling companies was a mere $2.1 million. Meanwhile, the 56 nationwide seed deals was the lowest total for any quarter in six years. The number of investments in seed and early-stage companies dropped 14 percent from the prior quarter, investments in later-stage firms jumped 54 percent in dollars (to $2.1 billion) and 11 percent in terms of deals (to nearly 200). Software companies took in the biggest slice of funding for all industries, with $1.1 billion invested during the first quarter. The software industry also had the most deals with 187. Both numbers, however, were declines over the previous quarter. There were 736 VC deals and $5.9 billion raised in the 1st Quarter of 2011. Very few of those deals were with telecom or network equipment companies (see spreadsheet at: http://www.siliconvalley.com/ci_18058891?source=pkg).

VC reluctance to invest in early stage companies is a strong trend in motion. During the second quarter of 2010, the U.S. venture industry’s average seed investment was $6.8 million, according to the National Venture Capital Association. The following quarter, that number had fallen to $3.5 million.

Contrast, the difficulty telecom and networking start-ups have in raising money with the $8.5B Microsoft is paying for Skype and the blow out IPO of LinkedIn, which is worth over $8B.  Neither of those companies will make any money in 2011!

From a recent Bloomberg Business Week article – Silver Lake Partners Wins $2.9 Billion Skype Payday

“Despite Skype’s heady usage stats—170 million subscribers, 600,000 new registrations a day, and 207 billion minutes of chat time last year—challenges still loom. Last year, Skype lost $7 million on revenue of $860 million and pushed back its planned public offering. Many skeptics still question whether Skype can turn its users, most of whom don’t pay for the service, into customers. Sounding like a luxury car salesman complimenting a buyer about his taste, Durban insists that Microsoft picked a winner. Plans have been put in place to flank Skype video chats with advertisements and to sell the service to businesses. “Microsoft probably got it at an inflection point before we showed the next big wave of growth,” he says.
The bottom line: Microsoft’s $8.5 billion purchase of Skype is a windfall for private equity firm Silver Lake. The Internet calling company is still unprofitable.”

LinkedIn was worth $4 billion as per the IPO pricing, but more than doubled on its opening day of trading to reach an $8B+ valuation. That event caused several skeptical analysts to compare the LinkedIn IPO to that of Netscape in 1995, at the start of the Internet/ dotcom bubble. Many observers are now asking: What has LinkedIn done to deserve its current price? Without any fundamental support from earnings or even any promising indicators of future growth, the company has done little besides feed off Silicon Valley’s latest buzzwords of “social networking.” Can we ascribe LinkedIn’s current market price to Facebook fall-out? Were those that bought LinkedIn stock after the IPO “smart money” investors?

Josh Bernoff, a social media analyst at Forrester Research wrote, “You can make some reasonable assumptions that the company will be successful and profitable in the future.” Perhaps, that’s because the number of LinkedIn members are growing and there aren’t visible competitors to lure them away. LinkedIn has over 90 million registered users, almost double as many as it had only two years ago. But many think that unless LinkedIn CEO Jeff Weiner can introduce a spectacular new innovation quickly, the stock will be selling below the IPO price very soon.

Columnist Stephen Zhu wrote, “Rather than being a game changer, LinkedIn only shows the promise of being a strong Internet media company with modest potential returns. Unfortunately, its IPO was overrun by hordes of public investors who wanted a piece of social networking and ignoring the value of LinkedIn itself. As more social media companies enter the market in the coming years, expect LinkedIn to revert to a more appropriate valuation. If LinkedIn as an investment interests you, check back later for a chance to catch it on sale.”

Summing up, we seem to have an “investment” mania for popular Internet software companies, yet a dearth of new money going into telecom and networking start-ups. Early stage start-ups have particular difficulty raising money.

0 thoughts on “LinkedIn and Skype $8B+ Valuations Contrast with Telecom & Networking Start-Ups which Can't Raise Capital

  1. Excellent article, Alan.

    It is amazing to see history repeated as the value of a stock doesn’t necessarily reflect what seems to be the fundamentals of the company.

    Having said that, the stock price does provide a currency of sorts for a company to grow through acquisition or just pure market place momentum, so that sometimes can meet the expectations of a high stock price.

    Still, at a certain point, a company becomes too big to support outlandish P/Es and, the stock may not crash, but it may languish for years.

    It will be interesting to see how LinkedIn leverages its 90M+ user base and whether or not today’s stock price accurately reflects its potential.

  2. Thanks for the article. Here are my opinions:

    -LinkedIn is a good social networking company, but may not be worth its current valuation.

    -Today’s VCs are not really venture investors. This is because they are not taking on “venture” risk. THe true goals of a given venture are replaced by pure profits and that’s all the VCs think about.

    1. Thanks Chandra. I tend to agree with your comment about VCs not taking on “venture risk.” That’s why they are mostly investing in later stage companies already in their portfolio.

      I wonder if Angel investors are more willingly to take this risk and invest in early stage companies. TiE Angels has been doing that for almost 1 year now!

      http://viodi.com/2011/01/21/tie-angels-update-4-companies-funded-3-companies-present-value-propositions-at-january-2011-meeting/

      http://viodi.com/2010/11/23/tie-2/

      http://viodi.com/2011/05/03/prelude-to-tiecon-tie-silicon-valley-announces-tie50-2011-winners/

  3. Very interesting contrast between money chasing Internet software companies (e.g. Skype, LinkedIn, others) and fleeing telecom/ networking companies. While I knew that VCs were mostly investing in later stage portfolio companies, I had no idea that VC investment in telecom/ networking had tailed off so much. What a change from 1997-2001!

  4. Very interesting article comparing overvalued Internet software companies with telecom/ networking start-ups that have great difficulty raising money. Is it assumed that Internet communications capability will remain stagnant given the stupendous increase in mobile broadband traffic?

    Keep up the great detective work!

  5. At an Israeli start-up event I attended this evening, it was very clear that new VC money is going into software companies= not telecom, datacom, or semiconductor. Blumberg Capital said they had over 2000 investment proposals from start-ups but only invested in 10 -12 deals per year! And none of those were hardware or infrastructure related! A guy came up to me after I asked a question about the future of the Internet if no new money was going into upgrading it. He said his mobile networking hardware company was struggling to get additional funding despite its great value proposition. That is really a shame and shows how short term focused the VC industry has become.

    Here is the email I sent to IEEE ComSocSCV Discussion group about the consequences of points raised in the above article:

    Telecom & Network Start-Ups Can’t Raise Capital contrasted with LinkedIn & Skype (and other Internet software companies) that seem to be overvalued
    There are many questions raised by two key points in this article. Please consider and comment on them

    1. There is a huge rush to invest in selected Internet software companies, especially social networking, e- commerce and gaming. Valuations are thru the roof.

    Is it all due to the Facebook effect? Or do these companies have legitimate growth prospects and become the next Google? Will many of these high flying companies crash and burn? Note the fate of Netscape which kicked off the Internet/ dot com bubble with its blow out IPO in 1995. Will LinkedIn (with an equally super successful IPO) succumb to a similar fate?

    2. VCs aren’t investing in new telecom/ network companies or early stage start-ups (of any type).

    So where will future innovation in the telco/ networking space come from? Is the reluctance of VCs to invest in this area due to telco cost pressures (4G, fiber buildouts, etc), telecom equipment company consolidation, pricing pressure from Huawei and ZTE, over capacity in core networks, or other reasons? Are Angel investors willing to invest in early stage telecom/ networking start-ups that can’t get seed money from VCs?

    Please share your comments with the Viodi View community by replying to this comment, or email me privately.

  6. LinkedIn and Skype are valued based on the market perceptions which can change. The fact is investors in those companies have been well-rewarded.

    Investments in hardware-oriented companies have been very few and far in-between. Key issues are- (1) Investors often cannnot see a sustained advantage in hardware companies for a number of reasons. (2) Investors’ exits can often take a decade or more due to stagnant equity markets.

    1. Thanks Basant. Do you think the future of the Internet is EXCLUSIVELY software? Evidently VCs believe that, based on what I’ve heard from them this year.
      IMHO, there are several hardware technologies which merit VC investment: multi- mode (wireless) pico base stations with Self Organizing Network (SON) attributes, outdoor wireless routers (with proprietary routing algorithms), OTN Add- Drop Multiplexers & Switches, 40G/100GE switches & routers, multi-mode GPON transport equipment. I’m sure there are more, but the point is if these forward looking types of hardware are not funded, they won’t happen on a large scale and the Internet will stagnate.

  7. It’s all about social networks, digital media, e-commerce, mobile apps, muti-player games,and other web software technologies now. VCs want to invest in these hot areas and don’t want to take a chance where there is true “venture risk.”

    1. Internet Bubble 2.0 seems to be here. This week Groupon filed for an IPO which is expected to fetch several billion dollars for the on-line coupon company.

      On June 2nd, the WSJ Reported: “the bubble feeling was running strong at the D9: All Things Digital conference, the ninth annual gathering of the tech elite. The mood in the crowd was giddy, as executives and investors chattered about the string of recent initial public offerings for Internet companies, including social-networking service LinkedIn Corp., Russian search engine Yandex N.V., and Chinese social network Renren Inc., among others.”

      “The [Silicon] Valley is heating up,” Mr. Stoppelman said. “We’re probably a little overconfident.”

      Read more: http://online.wsj.com/article/SB10001424052702304563104576359602567174630.html#ixzz1OL0Njkh7

Leave a Reply

Your email address will not be published. Required fields are marked *

I accept that my given data and my IP address is sent to a server in the USA only for the purpose of spam prevention through the Akismet program.More information on Akismet and GDPR.

This site uses Akismet to reduce spam. Learn how your comment data is processed.