12 Dec Venture capitalists view Facebook's valuation with caution
Editor’s note: WTN is presenting excerpts from the following column, which first appeared in the Chicago Tribune and MidwestBusiness.com.
Chicago, Ill. – In this week’s Reporter’s Notebook, we survey a few Chicago VCs who say a $15 billion valuation for social networking giant Facebook is an aberration.
Facebook could be a prelude to a second dot-comedy. The ascent of Facebook, which was founded in a Harvard dormitory room nearly four years ago, is no doubt the story of 2007 in the Internet industry as it has reached 50 million users and a $15 billion valuation. The company’s success, though, should not be seen as a barometer for the overall health of the Internet and technology industries, according to Chicago venture capitalists hoping to fund the next Facebook-like company.
“There is always a hot area of the market where valuations don’t seem to match any established criteria,” said J.B. Pritzker. He is a founding partner of Evanston, Ill.-based New World Ventures and investor in the Illinois Innovation Accelerator Fund. Pritzker added: “I don’t think Facebook is representative of the current environment.”
Cooling investment climate?
Also an angel investor in Chicago-based social network Viewpoints, Pritzker believes valuations for both start-ups and companies being acquired are more “grounded” today than during the boom of the late 1990s. He says old-fashioned attributes like revenue and the ability to turn a profit are more important than eyeballs and inventing the next new thing.
To that end, New World portfolio company Everdream (a software developer based in Fremont, Calif.) announced in Nov. 2007 it would be acquired by Dell. Pritzker added: “We are living in a world that doesn’t deserve to be called a `bubble.’”
Matt McCall – a managing director of Northfield, Ill.-based Portage Venture Partners – played a part in arguably the biggest Chicago Internet story of the year when his investment by the name of FeedBurner sold last June to Google for a reported $100 million. McCall believes the Facebook transaction has more to do with Microsoft than the marketplace.
“Most VCs view the Facebook deal as more of an ad buy by Microsoft versus an actual financing,” McCall said.
Regardless of the rationale, McCall forecasts a cooling period in valuations and deal activity in 2008 as investors respond to less exit opportunities in the public markets. He added: “We are definitely in the last phase of the market cycle. That said, there is an enormous amount of innovation going on. I would expect that to continue despite where pricing ends up.”
McCall is a co-investor with Pritzker in Viewpoints as well as in Crystal Lake, Ill.-based TicketsNow. In March, the $200 million-plus online ticket retailer raised $34 million from Adams Street Partners amid speculation that it would seek to go public or become acquired.
Tech focus
If volatility in the public markets continues and the overall economy slips into a full-fledged downturn, Pritzker says it becomes even more important to focus attention on the technology sector.
“There is a worldwide boom for technology because – even with a slowdown developing – nations are going straight into the Information Age,” McCall said. “There is a big opportunity for real technology companies to sell their wares all over the world.”
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