Investors are rushing investment decisions on hot internet companies and accepting weaker ownership rights than in the dotcom bubble, one of the biggest private equity investors in media and communications has warned.
Jonathan Nelson, chief executive of Providence Equity Partners, an investor in Hulu, AutoTrader.com and Baidu’s Qiyi online video service, said he saw a bubble in internet valuations, but was more concerned about the investment process involved.
“When you have investors making decisions in a matter of a day, that is usually a red flag,” he said.
“While the headline is about valuation, I think the real story is about the terms and the process. To me, valuation is always debatable in the moment, but process is very clear [and] there are troubling signs.”
Fast-emerging internet companies were allowing little time for due diligence, he said, and investors were accepting “unprecedented terms”, taking common equity rather than preferred stock and no board representation “as opposed to the old paradigm where you were welcome on the board”.
The rising private market prices of companies such as Groupon, Twitter and Facebook, valued last week at $70bn, has raised concerns over a repeat of the bubble in e-commerce, digital media and communications that preceded the dotcom crash of a decade ago.
Renren, the Chinese social media site, last week raised the price range for its planned initial public offering on Nasdaq amid strong demand, even as some investors were challenging the data it had provided to investors.
“There are real differences between what we are observing today in these companies and ten years ago,” Mr Nelson said, noting that wider internet penetration around the world meant that “some of these companies have real business models, real revenue and – in isolated cases – real [earnings before tax, depreciation and amortization]” that would justify their valuations.
However, the demand from eager buyers exceeded the supply of “premium” internet companies, he said, noting that internet market leaders such as Facebook in social media were “in their own league”, implying that not all imitators would merit similar valuations.
“GroupOn has a very interesting business model. The question will be, how does it fare against competition and what does scale mean for enduring competitive advantage,” he added.
High demand from investors was to blame for bubble conditions, Mr Nelson said, rather than the investment banks scrambling for advisory mandates to introduce internet companies to their clients.
Providence, which last year reaped a reported $3bn gain from the initial public offering of Kabel Deutschland, was not planning to cash in on high valuations by selling digital investments, Mr Nelson said.