A Changing of the Guard

Quick! Name the top 10 publicly traded consumer internet businesses in the US. When you woke up Thursday morning, the list was:

  1. Google: $171 billion market capitalization (26% annual revenue growth)
  2. Amazon: $90 billion (38% growth)
  3. eBay: $43 billion (14% growth)
  4. Priceline: $26 billion (38% growth)
  5. Yahoo!: $21 billion (-24% growth)
  6. Netflix: $13 billion (45% growth)
  7. Expedia: $7 billion (14% growth)
  8. WebMD: $3 billion (21% growth)
  9. Open Table: $2 billion (57% growth)
  10. AOL: $2 billion (-17% growth)

The next one down would have been Ancestry.com, and there wouldn’t have been many more with a valuation over $1 billion. Sixteen years after Netscape’s IPO, the most amazing fact about the Internet is how few large-scale public companies it has created, and how irrelevant some of them already seem to our daily lives.

That’s all about to change, because most of the companies on that list are about to change. One telling sign: it’s a lot easier to come up with a top-10 list of private Internet companies. If you’re a consumer under 40, you’re far more likely to have used their services today than those of WebMD, Priceline, AOL or even eBay:

  1. Facebook
  2. Groupon
  3. Zynga
  4. LinkedIn
  5. Twitter
  6. Gilt
  7. Living Social
  8. Pandora
  9. Yelp
  10. Foursquare

The first of those companies to graduate from the ranks of private to public ownership is LinkedIn. Worth $9 billion, or 36 times 2010 revenues and 520 times 2010 earnings, it debuted today at #7 in public-company market capitalization. With the possible exception of Foursquare, it seems very likely that each of the other private companies will be publicly traded in two years. Most will be worth as much or more than LinkedIn.

The technology community brought this about almost despite itself. Only a few years ago, the two most prominent thinkers in venture capital said that even their portfolio’s most ambitious companies shouldn’t necessarily go public.

One said that no one wants to run a public company; the other reported that his hand shook every time he had to sign off on a public company’s financial statements. Yet today the two are investors in nearly half of the remaining private companies on the list.

Back then, the investors cited regulations as the main problem. But what has changed since is revenues, not regulations. More importantly, the ambitions of entrepreneurs and investors have changed, in just the way we once hoped they would. As we wrote in 2008:

This quarter was the first since 1978 that a venture-financed company didn’t go public. But the real headline isn’t the dearth itself, but the fact that some of the smartest people in venture capital are fine with it. It’s like the PGA moved the Masters to a pitch-and-putt, and Tiger Woods applauded the decision.

…We have to keep building businesses to be businesses, not just to get bought. There are plenty of entrepreneurs who, if they could grow a business to $100 million and beyond, would prefer to keep building it rather than get acquired. The hard part for us isn’t the regulations, it’s getting past $100 million, which takes patience, big thinking, and a huge appetite for risk.

Fortunately, everyone heard the VCs’ warnings but almost no one listened. All except one of the companies on that list were around when investors declared that the public markets were no longer such a desirable goal, and all of them could easily have sold for life-changing amounts of money. None did.

And after years of caution, fortune now favors the bold. Wall Street bid LinkedIn up 109% on its first day of trading for all sorts of irrational reasons, but also because investors are starved for high-growth businesses. Growth is what new Internet businesses do best. If we as Internet entrepreneurs aren’t going for broke, no one else will.

And without a new wave of businesses, the whole Internet sector would become the domain of value investors, eager for Google to pay its first dividend. Already, eight of the top-10 public companies grew revenues by less than 40% last year, and analysts are much less optimistic about their growth over the next two years.

Everyone is debating whether LinkedIn’s stock ended today overpriced, but this isn’t the important debate.  What matters more than the day-of-IPO frenzy is that LinkedIn and all the other soon-to-be public Internet companies are going to grow much more over the next decade than the current top-10 will. And that means the Internet segment of the economy will grow much larger, too.


  • Foo

    I hate Facebook.

    • http://blog.redfin.com GlennKelman

      Do you hate your friends on Facebook or just the site itself?