It’s boom time again for today’s dotcom companies… and it’s the web pioneers of the late 90s who are bankrolling it. Tricia Holly Davis reports
An economic or speculative bubble, by definition, is a temporary financial condition under which markets are highly overvalued. Generally, a good indication of a bubble is the existence of a number of companies operating in a certain market that are not remarkably different, but whose worth is nonetheless overestimated.
If anyone should be able to spot a bubble it should be the first wave of online entrepreneurs who lived, just about, through the dotcom bust of the late 90s.
However, it is this very group that is bankrolling the next generation of start-ups, and according to some market analysts, helping to create yet another bubble.
The industry as a whole, according to some analysts, seems to be ignoring the fact that some of these new darlings of the online industry are, in fact, not doing as well as people think, and are thus dangerously overvalued.
Speaking a few month’s ago at the inaugural Travolution Awards, Brent Hoberman, co-founder of Lastminute.com, gave a nod to the new wave of entrepreneurs splashing on to the travel technology scene, namely the founders of Where Are You Now, in which Hoberman has a stake and is executive chairman.
Hoberman’s enthusiasm for social media sites such as WAYN is shared by a rising number of potential investors. Cheapflights’ David Soskin and Hugo Burge recently established a separate company, called Howzat Media, for the sole purpose of investing in start-ups. Thus far, Howzat has “raised commitments” to spend a total of £5 million on six to ten projects. There have been three investments so far, two of which are social media sites, including WAYN.
While this guardian angel set-up allows investors to quench their entrepreneurial thirst with minimum personal risk and the potential for maximum returns, it may be sending out a false signal of market security.
Take WAYN, for example. The website’s traffic has declined this year, in part because of the site’s original subscription-based model, which is being scrapped in favour of an advertising-based revenue model and a broader focus on travel.
“There is also a lot more competition now from sites such as Facebook,” says the site’s co-founder Jerome Touze.
However, the decline in traffic does not seem to have dampened investors’ interest.
Commenting on why he chose to invest in WAYN, Hoberman explains: “I saw the potential for great growth. It’s not a big brand yet, but the growth it has experienced so far has been strong, and all without advertising.”
Hoberman says he was also attracted by the opportunity “to be able to make a big difference in small company”.
“I wasn’t interested in another Lastminute. I liked the WAYN concept and the fact it has a strong, enterprising team.
“Though there is more money chasing less immature businesses now.”
Hoberman says the circumstances are not quite as worrying as the bubble days of old, when venture capital was effectively chasing venture capital.
Unlike in the early days of Lastminute, Hoberman says he doesn’t believe there is an artificial ecosystem of companies simply making money from other venture capitalist investments – a pattern that helped to burst the dotcom bubble of the last decade.
“I don’t think everyone will be a winner, but I don’t think we’re in a bubble either,” says Hoberman.
Cheapflights’ Burge agrees. Though the current boom may have an eerie familiarity to some, he points out that the online market is much more mature than it was a decade ago.
“We are in a slight bubble, so of course there is a danger,” says Burge. However, he adds: “A decade ago, the online model was unproven. Today, this is a much more mature market, with billions spent online every year. Plus, you have new, though now well-established pricing models, such as pay per click, and the technology itself has become immeasurably cheaper.”
Explaining what drove the decision to create Howzat, Burge says: “All entrepreneurs have a common drive and the ones who made a success in the original era of the web do not want to pass up new opportunities.
“There has been a significant shift in the way consumers access information over the past 10 years, and the opportunities are enormous. For us, we want to stick with what we know. I like the idea of spotting new markets, but Cheapflights tried to branch out into other areas with cheap short breaks and cheap accommodation, and it proved to be too ambitious and eventually we had to go back to what we do best.”
He says Howzat is the perfect solution because “it allows us to do things that Cheapflights doesn’t do”.
To that point, Burge notes that what he looks for most in potential investments is not necessarily a link with Cheapflights, but rather smart, innovative companies that are led by those with a strong entrepreneurial sprit.
Take TrustedPlaces, one of Howzat’s newest investments, as an example. Burge says: “They created a great, innovative product and they did it on a shoestring budget. That’s what’s attractive; not whether they can complement what Cheapflights does.”
At the moment, Burge says he is on the lookout for companies that have locked the vertical search model.
“I’m always thinking of what Google can’t do and I’m increasingly interested in non-travel companies, which is what attracted me to Zoomf.com”
When it comes to travel sites, Burge says his pet project is related to travel inspiration.
“No travel sites I’ve seen do this well, so that door is still wide open.”
But it’s not just the first-generation Internet entrepreneurs such as Hoberman and Burge who are interested in new investments.
Graham Donoghue, TUI new media director, says the company has considered investing in a number of technology firms, marking a significant departure from the company’s traditional business model.
The company’s most recent target was WAYN, but Donohue says Hoberman and Howzat beat him to it.
“A while ago, I drew up a list of organisations that I was interested in investing and WAYN was definitely one of them, but I backed away when Brent, and Hugo and David came on the scene,” says Donoghue.
An example of the type of company in which TUI would consider investing is Schmedley.com, a Web 2.0-driven, Internet-based desktop.
“This is a great example of using technology to do more customisation and personalisation,” observes Donoghue. “Net Vibes is another one we continue to look at.
“The point is organisations such as TUI are thinking about where it should invest. Should it be in the next generation in travel or in research and development projects? Who knows what’s going to happen. We spend billions on other assets, such as aircraft, so why not invest in these companies?” says Donoghue.
Like Burge, Donoghue says the companies in which TUI would invest do not necessarily have to directly complement its existing business.
“We would like to exploit what we already have but, at the same time, our margins are getting thinner in travel so we have to look at other opportunities.
“It’s not just about travel. This is about finding those companies or technologies that can help us bring our customers together, whether they want to chat or interact with one another. It’s not quite as clear cut as only working with travel companies either. It’s do you want to work with companies that have good technology and that are doing something different?” says Donoghue.
But Donoghue is cautious of the bubble-like environment and the fact that some companies may be fetching a lot more than they are actually worth.
While the industry may not be quite at the level it was a decade ago, when investors were literally throwing money at new ideas just for the sake of being new, Donoghue says there are some striking similarities.
“I do get the feeling that we are back in a bit of a bubble and there are many companies today that are
1995: Netscape goes public; Dotcom boom kicks off
1996: Yahoo! floats for $1 billion
1997: Amazon raises $54 million in an IPO
1998: AOL buys Netscape for $4.2 billion
1999: American Airlines, Continental Airlines, Delta Air Lines, Northwest Airlines and United Air Lines found online travel portal Orbitz.com with a combined investment of $145 million
2000: Lastminute.com is valued at $800 million on flotation; AOL agrees $350 billion merger with Time Warner; Dotcom bubble bursts
2001: Microsoft sells 75% stake in Expedia for £1.1 billion
2002: USA Networks – now IAC/InterActiveCorp –buys controlling stake in Expedia. IAC purchased the remaining stake in 2003; Travelocity buys Site59 for $43 million
2003: Orbitz.com launches IPO, fetching $24.98 per share
2004: Google goes public for $1.7 billion; Cendant Corporation buys Orbitz for $1.25 billion; Amadeus begins to take control of Opodo with €62 million cash injection for a 55% stake
2005: IAC and Expedia Inc. separate into two publicly traded companies; Sabre Holdings subsidiary Travelocity Europe buys Lastminute.com for £577 million; Cendant Corporation purchases Ebookers for £190 million; Cendant Corporation separates to create four separate companies – Real Estate Services, Hospitality Services, Travel Distribution Services and Vehicle Rental businesses
2006: Private equity firm The Blackstone Group agrees to buy Cendant’s travel distribution services business, for $4.3 billion, quickly rebrands the business to Travelport; Sabre Holdings agrees to be sold for $4.3 billion to private equity firms Silver Lake Partners and Texas Pacific Group; Wayn.com secures
$11 million in private funding
2007: Travelport subsidiary, Orbitz Worldwide, files intention to launch an IPO in the third quarter of 2007