Is it me, or are we starting to see small traces of the ‘dot com mentality’ returning to the valley?
I was reading a recent Fortune article* on Bit Torrent (the popular peer-to-peer file transfer protocol that accounts for more than 35% of traffic on the internet at any given time#), and how they plan to make money from it (right now it’s open source software, used mainly by people to pirate movies, tv shows, music, games etc).
Interesting to note that VC Firm Doll Capital Management (DCM) has already seeded the company with $8.75M. No real shock here, there are a lot of companies out there taking in large sums like this in a Series A financing - but how is DCM justifying the valuation? I mean, Bit Torrent doesn’t even have a real business model figured out yet (apart from the typical search ads and potential for yet another ‘online marketplace’). Granted we don’t know what the actual valuation was, but rumor has it the founders were looking for a pre-money of $100M!!
“I’m a big believer that when the majority of Internet traffic is goverened by BitTorrent and they have 45 million users, you’re going ot be able to monetize that” - David Chao from DCM. While in this particular case it may be true, this is scary thinking. certainly reminiscent of dot com thinking where companies were valued by obscure metrics such as clicks or eyeballs, rather than established business fundamentals like revenue growth potential or (heaven forbid) profitability.
I found myself thinking the very same thing about Skype, when I learned they were acquired by ebay for around $4B (yes that’s billion!). Sure Skype is great technology, and sure they have at least some money coming in by terminating VOIP calls on the PSTN network. But is this really a business model that would justify a multi-billion dollar valuation? I can’t help but think the valuation is based in large part on the popularity of skype. The number of users. The number of ‘ears’?
Well, if this does signify the return of dot com thinking I guess it’s not so bad. A lot of people will have the chance to make a LOT of money again. And hopefully we’re smarter this time around, and will get out before the crash :)
* “Torrential Reign” by Daniel Roth, Fortune, October 31, 2005.
# According to analysis firm CacheLogic last year.
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