Saturday, May 21, 2011

It Feels Like 1999 In Silicon Valley

I worked for a company called DigitalThink before joining SAP. DigitalThink was an E-Learning content provider with about $ 40 M in revenue and no profit. In the height of the Internet boom, DigitalThink was valued at about $2 Billion. The valuation was due to the naive belief that anything Internet is going to grow like crazy. Then came 2001 and after lingering along for a while, DigitalThink was sold to a division of Convergys for $120 Million. The reason for the fire sale was simple. The company was just not making any profit.

Some of my former colleagues went on to join other companies or start new companies. Some of them even joined companies such as SuccessFactors, CornerStone OnDemand and LinkedIn. Today I see a similar frenzy in the market where many companies which do not make any significant money and no profit are valued at billions of dollars only because they fall into the category of Cloud computing or Social Networking. Another reason is that there is practically no place else to invest your money.

I believe that the inevitable disappointment is not far away. What happens when there are other less risky investment options available for institutional investors. What happens when the insiders are allowed to sell their options. What happens when the visionaries who started these companies move on to become angel investors or venture capitalists. What happens when every shareholder realizes that there is no silver bullet. I hope reality sets in soon. I have seen this from the inside and I don't feel good about this.
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