Okay, this settles it: we are in the midst of a social media bubble, and it is getting bigger at an alarming rate. Worse, it is about to ascend to the next stage of insanity -- and become a Bonafide Bubble -- as companies go public and everyone is invited to get rich quickly and effortlessly by doing the same thing as all the other people trying to get rich quickly and effortlessly.
What is all this doom and gloom based on? Since December the estimated value of Groupon, the social deal juggernaut with plans to go public in the not-too-distant future, has increased from just under $5 billion to "$15 billion or more," according to The New York Times.
In two weeks.
So, to review, that means the market's herd consensus on Groupon's value trebled -- to a figure 1.5X the gross domestic product of Brunei in 2009 ($10.6 billion) -- in less time than it takes to complete a tooth-whitening regimen.
There's no question Groupon is an innovative, successful company with a revolutionary new business model, and excellent prospects for expansion and revenue growth. But my question is: what changed between December -- when Groupon rejected a $6 billion buyout offer from Google, then announced a round of funding which raised $950 million and valued the company at $4.75 billion -- and today?
Well, a number of things didn't happen. Groupon didn't release financial results; as a privately-held company it doesn't have to. Execs said revenues exceeded $1 billion in 2010 -- but these statements included no details about the company's profitability. Meanwhile no new products or services were unveiled, no new strategic partnerships announced, no big names joined the board of directors. They did buy a handful of small group discount companies in Israel, India, and South Africa (SoSasta, Grouper and Twangoo) and hire a chief financial officer -- Jason Child, who previously served as the vice-president of finance for Amazon's international business -- which is always a good step. But aside from that, nothing much seems to have happened -- besides, of course, the much-reported $950 million love-fest.
True, earlier investments might be a basis for ponying up your own dough -- provided there are also some details about what the company plans to do with the money they've raised. And "we're going to get bigger" isn't enough: of course Groupon will find something to spend the money on, including overseas competitors, the question is whether these choices constitute an effective growth strategy.
Groupon execs may very well have an awesome, rock-solid plan for scaling the business up, which will require (among other things) reducing costs associated with its personnel-intensive local sales approach. But right now there are precious few details about the strategy, period -- good, bad, ugly, whatever. The press release announcing the latest funding, while entertaining ("Groupon Raises, Like, A Billion Dollars") is just as vague as comparable PR products from other companies, explaining that Groupon will use the money to "fuel global expansion, invest in technology, and provide liquidity for employees and early investors."
So basically... they're going to get bigger. Leading me to conclude that the only reason Groupon's value increased over 100% in less than two weeks is because it raised some money, and everyone says its value increased. The simple fact of other people investing in something is, to my mind at least, a pretty thin rationale for investing even more; in fact it is the definition of "herd mentality." Thankfully a public stock offering is coming soon, according to the NYT, and the stock market will have a chance to exert its strong rationalizing influence and mitigate the bubble dynamic.
To quote Homer Simpson: "In case you didn't notice, I was being sarcastic!"