The building of the social media bubble
To quote Om Malik, Though VCs are doing fewer deals than they were before the recession really took hold in late 2008, the amount of money invested is up to prerecession levels. That’s good news for startups trying to raise money — at least in the short-term. But the valuations of some companies compared to their revenue might spell trouble for the future.
A quick look at the valuations reveals the stretch.
As discussed in an earlier post, the hype of investing in social network shares could be short-lived for the following reasons.
1.Networking businesses have still not demonstrated their ability to leverage their networks in order to generate returns. These networks do not have a proven business model
2.Social Networking companies form part of a sector that will constantly continue to attract capital and new competitors. This is more than likely a bubble that will eventually end.
3.An additional concern was that social networking sites were very often strong in a particular region and not in international terms. This makes it difficult for social networks to grow globally and achieve critical mass in local regions.
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