Fear of Past Dot Com Crash: Venture Capitalists Only Interested in Consumer-Targeted Companies like Facebook or Groupon

Fear of Past Dot Com Crash: Venture Capitalists Only Interested in Consumer-Targeted Companies like Facebook or Groupon

The dot com crash has had a big impact on how venture capitalists invest in the current market. To understand why, it is important to know a little history about the impact of the Internet and why these investors are leery.

The Internet became commercially popular in the mid-1990s.  By 1995, there was an estimated 18 million users on the net.  This led to the creation of online businesses which led to speculation about how big these companies could grow.  The problem came with how much these companies were actually worth vs. how much they were perceived to be worth. 

What causes a bubble and eventual crash?  When people get excited about a company stock, it can drive the price up but if it inflates to an unrealistic point where investors get wise to the fact that the company can’t be worth as much as they hoped, people bail, sell the stocks, the price drops, and the company crashes. 

The pain of those dot com crashes are still felt today.  Venture capitalists now may be more hesitant to invest.  Tom Abate with SFGate.com said that venture capitalists in 2000 made about 8000 investments valued at $100.5 million.  “In 1999 and 2000, Wall Street invested in 534 venture-backed initial public offerings.” Those, who cashed in early, made a lot of money.  As large amounts of money were being put into the market and speculation was growing, the bubble was forming.  NASDAQ hit its peak on March 10, 2000 at 513252, only to lose 78% of its value by October, 2002 when it dropped to 11411.

In 2001-2002 while a lot of companies were over-valued and going bankrupt, people found their stock purchases were not such a great investment.  So now when Facebook and Twitter are considering going IPO it has some potential investors concerned.  This is especially true in the case of Twitter that has yet to publically show their business plan. 

What has the effect been on venture capitalists investing?  An article in Investopedia stated, “In the year 1999, there were 457 IPOs, most of which were internet and technology related. Of those 457 IPOs, 117 doubled in price on the first day of trading. In 2001 the number of IPOs dwindled to 76, and none of them doubled on the first day of trading.” SFGate.com reported, “In 2008 and 2009, a total of just 18 venture-backed companies went public.”

Investments have picked up for the consumer-oriented companies like Facebook and Groupon.  However there has been a venture squeeze for companies with business products.  Wall Street Journal reported, “In the first three months of this year, venture-capital investment in consumer tech companies nearly tripled to $874 million from $310 million a year earlier. Meanwhile, investments in tech firms with business products rose at a slower rate to $2.3 billion from $1.9 billion a year earlier.  The shift away from business-oriented technology start-ups has been gathering steam over the past few years. Venture investment into such companies was $11.9 billion in 2010, down 35% from $18.4 billion in 2006, according to VentureSource. The overall number of financing rounds these companies received also dropped 18% to 1,261 during that time.”

Related articles

• Shifts in the Venture Capital Market (ipo-dashboards.com)
• The New Rules of Raising Cash (online.wsj.com)
• Why Companies Are Not Going IPO: Are Skype, Twitter and Facebook Projected IPOs in 2011?
• Top 50 Venture Funds for 2011 

Wealthy Individuals Use Social Media More Than Most Americans

There is no denying the popularity of social media.  There are so many sites, it can be difficult to keep track them all. It is interesting to see who is actually using social media.  When sites like Twitter came out, many were using it more as a means of chatting about their day.  Times have changed and social media is now a very useful tool for businesses.  Sites like Twitter and Facebook now have a strong business presence. 

Wealthy individuals are recognizing the importance of using social media.  Recent polls have shown the wealthy to use social media more than the average Americans. See the results of a recent poll by SEIC.com listed below.  To read the full article, click here.

OAKS, PA., Oct. 19, 2010 – A new Quick Poll from SEI (NASDAQ: SEIC) today showed that 70 percent of high-net-worth individuals surveyed are users of Facebook and other social media sites. That’s considerably more than the number of daily social media users among the general populace. According to an August, 2010 report from the Pew Research Center, titled Older Adults and Social Media, 61 percent of Americans ages 18 and over have used a social networking site.

However, the Quick Poll results make it clear that wealthy individuals have a hard time squeezing in their social media time – just 17.4 percent of respondents said they use social media on a daily basis. While 38 percent of those surveyed by Pew had used a social networking site in the previous 24 hours.

SEI surveyed 46 wealthy individuals with more than $5 million in investible assets. Of those surveyed that use social media, 50 percent said they use Facebook. Thirty-seven percent of respondents said they visit YouTube, while just under 35 percent use LinkedIn.

One in ten (11%) online adults ages 50-64 and one in twenty (5%) online adults ages 65 and older now say they use Twitter or another service to share updates about themselves or see updates about others.

The use of Twitter and other services to share status updates has also grown among older users—most notably among those ages 50-64. While just 5% of users ages 50-64 had used Twitter or another status update service in 2009, 11% now say they use these tools. On a typical day, 6% of online adults ages 50-64 make Twitter a part of their routine, up from the 1% who did so in 2009.

By comparison, social networking sites have gained a much larger foothold in the lives of older Americans over time. One in five (20%) adults ages 50-64 say they use social networking sites on a typical day, up from 10% one year ago. Likewise, 13% of online adults ages 65 and older log on to social networking sites, compared with just 4% who did so in 2009.

Email and online news are still more appealing to older users, but social media sites attract many repeat visitors.

While email may be falling out of favor with today’s teenagers, older adults still rely on it heavily as an essential tool for their daily communications. Overall, 92% of those ages 50-64 and 89% of those ages 65 and older send or read email and more than half of each group exchanges email messages on a typical day. Online news gathering also ranks highly in the daily media habits of older adults; 76% of internet users ages 50-64 get news online, and 42% do so on a typical day.¹ Among internet users ages 65 and older, 62% look for news online and 34% do so on a typical day.

Social media properties—including networking and status update sites—are newer additions to the daily digital diet of older adults. Yet, the “stickiness” of the sites is notable. To look at the data another way, among the pool of adults ages 50 and older who use social networking sites, 44% used them on the day prior to their being contacted for our survey.

The pool of Twitter and status update users ages 50 and older is too small to segment, but the behavior of this limited early adopter group does suggest a similar tendency towards regular use of the sites.

By comparison, less than half of online banking users ages 50 and older visited the sites on a typical day and less than one in five older users of online classified sites reported use of the sites “yesterday.”