Rant: VC’s and Social Apps
There is an important distinction to be made between finance and technology. The plain and simple fact is that money dominates all business and for consumer technology to establish itself as a business it must play this ‘back and forth’ game with finance. Some venture capitalists, specifically those who invest in early stage social apps with little to no vision or revenue model, seem to be playing this back and forth on thin ice. These investments in Silicon Valley are often a hit or miss, investing millions of dollars in multiple different companies hoping that at least one will succeed, which, in my opinion, is just heavily financed gambling. While some venture capital investments have revolutionized the world as we know it, others are the driving force behind what I believe to be the financial social bubble of Silicon Valley.
The current financial bubble, a series of large speculative investments with no prospective future returns other than a Facebook buyout, is undoubtedly a social one. That is, now that social media applications are receiving a huge payday from large organizations like Facebook, Google, and Yahoo, techies and ordinary people alike are flooding the market to create seemingly trivial apps. Some of the world’s best technical talent is spending their time to create applications that make no tangible impact other than an increasing feeling of online social connectedness, a vain sentiment at best. With any market that has relatively low barriers to entry (in this case picking up a programming language or two and in some cases not even that) it becomes seemingly easy for companies and students alike to compete for the next big acquisition spot, forcing a large amount of products to enter the market in a short time span. Though it is one thing to compete with each other over an acquisition spot, it is completely another to be financially backed with real money when the only thing compelling about their pitch was the hoodie and slippers each member of the team happened to wear coming in. With enough financial pull, I can rationalize as to why the larger VC’s would make that bet but the fact that boutique VC’s are doing the same is a sign of trouble to come.
Herein lies the dilemma of the venture capitalist, to invest or not to invest in possibly the next billion-dollar acquisition, of which investors could take in about 8% of the acquisition earnings. It seems like an easy choice for any investor because hedging their bets in favor of an acquisition exit and pooling money into the artificial valuation pot will only boost their portfolios relative value, but the catch is that some of the investments they make can earn close to nothing for a few years and run solely on venture money. How long will it take them to realize that the social advertising industry is only so big? The bandwagon nature of investors in this space, looking for the next young college graduate to have an interesting enough mobile app to catch the sights of bigger companies, has clouded their minds to such an extent that if they hear you use the word ‘ephemeral’ enough times then chances are you will be backed. This flaw in the venture system stems not from greed but a misconception of the use of social technology, the growing divide between generations, and the fad-like nature of social technology in general. Then, the most obvious question becomes: Where is the money financing this bubble coming from? The answer to this question, in the most economic terms I know, is everywhere, from angel investors to celebrities to family and friends.
Why do these large companies pay so much? The real key to note here is that users are at the center of this financial bubble because larger companies are looking to acquire users they currently do not have, i.e. people who are not on social mobile applications they own or people who are interacting in a different manner on a certain product than existing products allow. And it is for this reason these companies are paying a huge premium because to them it just checks another box on their demographics list, till they essentially monopolize the market. Simply put, the value of owning both App X and App Y is greater than the sum of the value’s App X and App Y individually. The question I choose to leave off at is whether the advertising industry is truly large enough to accommodate for another 10 Billion Dollar sexting app?