Valuations of $10 billion and more for promising young Internet businesses such as Zynga and Groupon have investor Gary Gigot (’72) worried about another tech bubble.
“It doesn’t make sense that these companies have that value,” Gigot said in answer to a question after his talk to entrepreneurship students April 12 at the University of Notre Dame’s Mendoza College of Business. His presentation was part of the center’s Entrepreneurship Week activities.
The benefactor of Notre Dame’s Gigot Center for Entrepreneurial Studies, Gigot was referring not only to Zynga, best known for its Farmville game played on Facebook, and Groupon, a Web-based coupon-sharing business, but social media household names Twitter, valued at $8 billion to $10 billion, and Facebook, estimated to be worth $50 billion or more.
The most recent tech bubble burst in the late 1990s after a flurry of initial public offerings for Internet startups such as Pets.com hit the market. The sites attracted large numbers of users, but few sites were making money. Some, including Google and Amazon.com, eventually flourished. Many (like Pets.com) never did and folded.
The latest Internet success stories such as Groupon are said to be profitable already (although outsiders can’t say for certain because the companies aren’t traded publicly yet). But as with the last bubble, investors are betting on bigger things to come.
“I think at the end of the day, it’s probably going to end up in the same bad place,” said Gigot. Deep-pocketed early investors who exit early will make millions. Smaller investors who buy in after the companies go public will probably lose money, he said.
Gigot was a vice president of marketing at Microsoft before becoming an investor in business-drawing software developer Visio Corporation from 1994-99. He also signed on as the company’s chief marketing officer. During his years with Visio, the company’s market capitalization rose from $25 million to $1.3 billion, after it was sold to Microsoft.
Gigot is now an investor in and adviser to several developing companies. He serves as adviser to Optimum Energy, whose software helps manage energy consumption in buildings; board observer for Sesame Communications, a website company that specializes in dentists; and executive chairman of LiveRez, which makes software for managing vacation rentals.
In his talk, “Startups to Exit Strategies: Creating Category Defining Companies,” Gigot described Optimum, Sesame and two other companies in which he’s invested. He also described how the world of tech investing has changed in recent years.
One change he mentioned is that the founders and employees of Facebook are already capitalizing on their company’s success by selling stock in private placements ahead of any public offering.
He also said that many of the founders of Facebook and Twitter have left the companies to form their own venture-capital funds. The individuals are investing in and working directly with founders of young tech companies, cutting out the traditional venture-capital firms.
“It’s nothing I’ve ever seen in the whole time that I’ve followed venture capital over the last 30 years …,” he said. “They’re not just creating great companies, but they’re creating new funding sources that are starting to take over the landscape of new startups.”