David Prosser: How quickly the lessons of the dot.com collapse have been forgotten

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The Independent Online

Outlook It is more than a decade since the dot.com boom turned to bust in such spectacular fashion – quite long enough, it seems, for investors to have forgotten all the lessons of an episode that, with the luxury of hindsight, was madness.

Less than two months ago, Twitter raised money from American investors that valued the company at $3.7bn (£2.3bn). Now it seems that super-early-stage takeover talks with the likes of Google and Facebook value it at as highly as $10bn. Estimates of its value are growing even more quickly than for Facebook itself, where the latest venture capital investments suggest it is worth $50bn, five times more than at the previous financing round in 2009.

The dot.com mania is back. The $315m agreement that saw AOL buy the Huffington Post earlier this week was just the latest in a string of deals with prices that bear no relation to reality.

Is Twitter worth $3.7bn or $10bn? The truth is that no one knows: those who stake their cash at this sort of valuation are doing nothing more sophisticated than laying a bet. Just to remind you – and not to engage in the guess-the-value game – there isn't much transparency on what Twitter makes, but the best guess is that it made a loss on sales of around $45m last year, though these revenues are expected to more than double in 2011.

Cash in while you can is all one can say to the executives of these companies. The founders of Linked In, the social networking site working towards its IPSO, will be rubbing their hands with glee. So too those at Groupon, the voucher company.

Will it be different this time? That is always the argument during any bubble. Well, maybe the global interconnectedness that the internet delivers really has shifted us into a new paradigm. It would just be nice to see any of these companies make even a fraction of the money necessary to justify their lofty valuations.

Of course there will be winners. Google, launched during the last dot.com boom, has outstripped all expectations. Facebook seems to be on a similar curve, although it does not begin to throw off the cash generated by the search engine.

That, however, is not the point. The lesson of every bubble from tulip mania onwards is that those who invest on the promise of outlandish returns they cannot begin to justify on any objective analysis almost always lose their shirts.

Let's put it this way. Has Twitter, even if it is a global social phenomenon, really shown us it can make three times as much money as we thought just six weeks ago?

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