Billionaire bubble boys

Last week, a group of US tech billionaires sat down to dinner with US President Barack Obama.

Facebook founder Mark Zuckerberg was there, Eric Schmidt from Google broke bread and even Steve Jobs left his sick bed to dine with the Prez.

The subject of the dinner conversation remains a mystery but we hope talk turned at some stage to the topic of tech valuations.

More specifically, whether the run of tech sector valuations we’ve seen in the last six months are symptomatic of a new dotcom-style bubble building.

With Facebook valued at $50 billion under the terms of a recent capital raising, the one-year-old group buying site Groupon valued at $6 billion and Twitter valued at a rumoured $10 billion, bubble fears have some foundation.

US media billionaire Mark Cuban – who made almost $6 billon when he sold Broadcast.com to Yahoo at the height of the last tech boom – went so far as to describe the current round of tech valuations as being akin to a pyramid scheme.

“It’s almost the 2011 version of a private equity chain letter,” Cuban told PEHub.

“Remember the old chain letter, where you put up some money then you got other people to put up some money and you gave it to the people who were in the deal before you? That’s what’s happening today.”

“The early (VCs) are getting the new (VCs) to invest enough money at high enough valuations that they get most if not all of their money back.

“Then the next round (sees) someone else invest more money at a higher valuation, returning cash to the last two rounds of investors. By the time you get to the last (VC) standing those last few rounds hope they can get a return from the public markets.”

“That may be very tough. But the only players really on the hook are the guys from the last rounds. Just like in a chain letter.”

Cuban’s point has been refuted by a number of industry veterans, most notably YCombinator’s Paul Graham, who says bubble fears are being overplayed.

He says current valuations involve smarter investors buying into better companies than occurred in 1999-2001.

As well as creating a new bubble debate, the huge valuations have vaulted a select group of young tech founders towards the billionaires club.

Here are four of the leading lights, with their theoretical paper-only valuations:

Mark Zuckerberg

Company: Facebook

Wealth: $15 billion

Forbes magazine valued Facebook chief Mark Zuckerberg at $6.9 billion in September 2010, when the company was worth $23 billion. At the new valuation of $50 billion Zuckerberg could be worth around $15 billion.

An IPO is tipped for late 2011 or early 2012 and either way Facebook will start publishing its financial results from early next year, allowing investors and commentators to see if the company can start living up to its valuation.

Andrew Mason

Company: Groupon

Wealth: $1 billion

Andrew Mason went from unknown entrepreneur to tech sector hero last year when Google began chasing his group buying website with a takeover offer believed to be $5-6 billion.

Mason eventually rejected the deal – apparently fearing that such a takeover would be detrimental to Groupon morale – and a subsequent $950 million funding round essentially confirmed the valuation.

Mason, best described as being slightly eccentric, seems to be trying to take a long-term view of his business, saying recently that consideration of an IPO would be “less about where Groupon is this year than about where it will be 10 years from now”.

Mark Pincus

Company: Zynga

Wealth: $850 million-$2 billion

Zynga is the leading social gaming company in the world, generating the bulk of its reported $500 million revenue from Facebook game Farmville.

Founder Mark Pincus is a tech veteran. He sold his first company, called Freeloader, for $38 million in 1996 and went on to float Support.com in 2000 in a $60 million raising. He’s also had some failures – an early social networking site called Tribe failed.

Pincus was valued at $850 million by Forbes in September 2010, when Zynga was valued at about $4 billion. Recent valuations suggest the company could be worth up to $10 billion, which would turbo-charge Pincus’ fortune.

Gabe Newell

Company: Valve

Wealth: $1-2 billion

Gabe Newell is probably the least known of this tech quartet. He founded gaming company Valve in 1996 and built it into an online powerhouse – its website Steam has 30 million users.

A recent article in Forbes valued the privately-held company at $2-4 billion, which puts the fortune of Newell (who owns more than half the company) somewhere between $1-2 billion.

While Newell might struggle to capture attention like Zuckerberg and Pincus enjoy, reports suggest that his business delivers profits far in excess of their companies.

It must be stressed that these valuations are highly speculative.

An IPO would get these entrepreneurs closer to crystallising the value in their websites but even then Zuckerberg and Co. would only be paper billionaires – and we all remember how many paper billionaires from the dotcom boom ended up.

But as tech veteran Andrew “Flip” Filipowski told SmartCompany last week, not every bubble billionaire ends up with nothing.

Out of the dotcom wreck emerged companies like Amazon and Google, which would eventually create three of the world’s richest men – Larry Page, Sergey Brin and Jeff Bezos.

There will be winners from this round of tech hype. But who will they be?

The businesses of Mason and Pincus would appear to be the most susceptible to competition. Groupon is battling a range of imitators in virtually every market it plays in and Zynga’s competitive set is similarly large.

While Facebook’s $50 billion valuation looks over the top it must be noted that Zuckerberg has created a platform as much as a social networking site.

From Facebook Zuckerberg can sell advertising products, gaming products and in certain circumstances access to its user base. With more than 500 million users the competitive barriers around Facebook are high.

Zuckerberg looks most likely to become a permanent member of the billionaire’s club but even he’s not getting carried away. Last month he moved into a modest five bedroom house in California.

And he’s only renting.