Week after week, investors have seen multi-billion deals for online businesses with suspect business models. In January, Goldman invested in Facebook at a $50 billion valuation. Zynga's reported $7-$10 billion valuation surpassed that of software giant EA Games. With its recent I.P.O. announced, Groupon even values itself at $15 billion. Some question the reason behind such high valuations...the answer is immense revenue growth. The true question is whether this revenue growth is sustainable:
"Why are Venture Investors placing colossal valuations on consumer Internet companies like Facebook, Groupon and Zynga? Their revenue growth is simply off the charts.
The Wall Street Journal reported Friday that Groupon's revenue in 2010 rose more than 22 times to $760 million in its second full year since its daily deals site launched, up from $33 million in 2009. Zynga, the maker of online social games like FarmVille, scored revenue of $850 million in its third full year in 2010, more than triple the year before, and Facebook's revenue rocketed to as high as $2 billion in 2010, its sixth full year.
Their ridiculous revenue growth rates actually rival those of the four largest Internet companies-Google, eBay, Yahoo and Amazon.com-early on. Taking a look at the line graph below, Groupon and Zynga's charted growth is steeper than San Francisco's famous Filbert Street. Over the longer haul, Facebook's sales fall short of the two Internet kings, Google and Amazon, but top those of eBay and Yahoo, in their first six years.
Granted, Amazon, Google, eBay and Yahoo grew up during the dot-com boom a decade ago when online advertising and e-commerce were in their infancy-so their growth is arguably more impressive-but the chart does highlight just how fast this latest crop of consumer Internet companies has come along, and why venture firms have been fighting to own a piece.
Not only is revenue exploding, but profits are, too. Through the first nine months of 2010, Facebook made $355 million, meaning it likely scored a profit well over $400 million, if not $500 million, for the year. Google's net income in 2003, its sixth year, was $399 million. Zynga's profit was also about $400 million in 2010, only its third full year.
Compare all of this with the software industry. As we analyzed previously, less than one-third of the nation's top software companies reached $50 million in annual sales in six years or less-and the fastest to $50 million, Novell, took three years. Microsoft crossed the $50 million barrier in eight years; Oracle, 10 years.
A big question for these young Internet companies - is the growth sustainable?" WSJ Blog