Silicon Valley VC Rumblings
Margie is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
On a recent visit to Silicon Valley, I was privy to a conversation with a high ranking member of a venture capital firm that initially funded Groupon (NASDAQ: GRPN). The conversation went something like this:
“Congrats, you guys made a mint bringing them public.”
VC: “We did well.”
“Do you own any shares? The company, as I’m sure you know, has tanked.”
VC: “No, we sold high. We don’t really look back.”
“At some point, don’t you think the company becomes a buy? I mean, before it went public Google bid $6 billion for the company, and its current market cap hovers around $2 billion. Google (NASDAQ: GOOG) has historically made some very good acquisitions, even paying more than Wall Street would have anticipated to get a hold of a company they believed to be strategically important.” (From YouTube to Android)
VC: “It’s possible. However, I doubt the long term viability of the daily deals sites. In general, the quality of the customer the deals bring in isn’t the best. These are cheapos looking to save a buck, and rather than become a long term customer, they’ll go out and subscribe to the next daily deal.”
“Based on this, why would any company want to buy Groupon?”
VC: “The company has some good relationships with all these businesses, and will be branching out and supplying them with back-end solutions that will help their bottom line. That, in my opinion, is its future.”
I don’t know if Daily Deals will end anytime soon, and not every business loses money doing them, but the increased competition from Amazon (NASDAQ: AMZN) (Living Social, Amazon Local) and Google Offers give businesses more choices of where to go, and often a better split than what Groupon offered originally.
I am not a big fan of investing in a business that has to reinvent itself in such a short time frame. Groupon may yet succeed, but I am staying clear.
The conversation turned to Facebook (NASDAQ: FB), which I believe will ultimately be a very successful public company. The following is summation of conversations I had with several VC’s, one of whom cashed out in social media as his company sold MySpace to Fox.
Me: “What do you think of Facebook? Many people in the investing community think it’s overpriced?”
VC: “Facebook has such a massive number of subscribers, over 1 billion, a lot of whom, are very active. The first question I have is whether Facebook can wriggle $50 a piece out of them over their lifetime. Every time you log in, there is some revenue going to Facebook with the ads popping up (display advertising,) even if you don’t click on it, you are being made aware of a product that fits your specific demographic/ interest. This does have value to the advertising company.”
Me: “I think that Facebook’s future might lie in gambling. Already on the British version of the site, they have bingo and slots provided by third parties. I imagine that if poker is legalized here in America, Facebook might have the world’s largest small buy-in online tournaments. After all, poker is a largely social game.”
VC: “That’s possible, but not certain. One thing you may or may not have noticed is that Facebook already knows when all your friends’ birthdays are, have created a gifting button which will allow you to purchase them a gift of some type. I personally believe this is a great idea, and will be a resounding success.”
Me: “And if not, they will continue to experiment until they get the formula right.”
VC: “Yes, I think the primary question to ask yourself is whether Facebook can get $50 plus on average out of each customer. While there are many poor people in third world countries who might only contribute pennies, my expectation is a strong yes.”
Me: “What about Google Plus? Does this pose a real threat?”
VC: “If Facebook does something to alienate users, then definitely. That’s why I expect Facebook to move in slow increments. It’s most valuable asset is its active user base, which keeps other people active as well.”
Me: “By the way, congrats on your MySpace sale.”
VC (shaking head): “If we had waited another 7 months to a year, we’d have gotten $5 billion for it.
Me: “Well, $500 million isn’t chump change.”
I do believe that Facebook will generate substantial profits in its future, and if online poker is legalized in the United States, then I think it’s a good bet that Facebook will be the major player here. I am long Facebook.
margiecfl has positions in Facebook and Google. The Motley Fool owns shares of Amazon.com, Facebook, and Google and has the following options: long JAN 2014 $20.00 calls on Facebook. Motley Fool newsletter services recommend Amazon.com, Facebook, and Google. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!