Social media bubble burst at 12.15 pm New York time on May 18: Valuation guru

The social media bubble that had been building up for the last five to six years might have actually burst. Aswath Damodaran, Professor of Finance at New York's Stern School of Business, and one of the world's topmost experts on valuation, says Facebook IPO "might be actually the trigger for the end of momentum game" for social media companies.

"I wouldn't be surprised if this is a dampener for new social media IPOs," Damodaran told VCCircle in an exclusive interview last week. The finance guru was in Mumbai for a two day training programme on corporate valuations organised by VCCircle's training arm.

He, in fact, spots the exact time when the bubble was pricked. "We can trace back the end of social media bubble to 12.15 pm, Friday (May 18), New York time, when the stock started going down from 42 to 41 to 40...you could see the crowd shifting. It's like everyone suddenly started turning in one direction. You could see Morgan Stanley (Facebook's lead underwriter) trying to stop the crowd. But they discovered very quickly there were so many people in the crowd that they did not have the capacity to do it. They actually tried (to stop) on Friday and the stock closed at $38. But on Monday (May 21) they gave up." This was when the stock crashed down to $33 and on Tuesday the stock went down to $31 levels.

"If the momentum goes the other way, it can overshoot," says Damodaran.

This fall might have come hardly as a shocker to the professor who had written a blog post a few days before the IPO that Facebook might be adequately valued at $29 per share (or enterprise value of $72 billion). A few days later Facebook priced its stock much higher at $38 a share (or $104 billion ) and the rest is history.

It's interesting, the Facebook IPO, which was seen as harbinger of several more tech/social media IPOs to come, has finally turned out to be a trigger point for the bursting of bubble 2.0.

He, however, adds that the bubble would have burst anyway, if not now, probably six months later. The fundamentals would have caught up, the advertising revenue projections would have met with realities (for instance, on May 15, General Motors said it would pull out Facebook advertising as they were not effective).

"I think this (the fall of social media) would have happened eventually. But what made it unfortunate was that it happened at hyperspeed, just one hour after the IPO," says Damodaran.

Now people have a villain. Everyone in the (social media) ecosystem - not just media, including companies and investors - are really, really "mad" at Facebook and Morgan Stanley for accelerating the burst of the social media bubble, says Damodaran. They are looking at Facebook and Morgan Stanley as those who killed the golden goose.

The impact of the end of the momentum game is huge. Not only it will affect other social media IPOs who are waiting in the wings to go public after FB did, but it will also have a ripple effect on the entire ecosystem – social media consultants, investment bankers, intermediaries and so on, who have been enjoying a long and happy party.

Also everything that looked good about the social media company is suddenly starting to look ugly. Even the founder Mark Zuckerberg's wedding soon after the public debut was no longer "cute" and even questions are being asked how he could have been so irresponsible.

VCs pulling out of social media

Another big fallout of this is the potential reverse of venture capital investing in social media. "Wait for three months, you will see VCs totally pulling out of social media and going for something else where they can get out of quickly," he said. According to him, VC money will dry up for social media as there will be no exit avenues with IPOs standing no chance of success.

Damodaran also had a damning comment on the VC model. "VCs don't want to convert interesting ideas into full blown companies. They want to convert ideas into potentially commercial ideas, then flip them over to the market and let the market deal with the risk of evolving them from commercial ideas to stable businesses, while VCs will move on to the next idea," says Damodaran, adding, "I dont blame them for what they are doing, but I also know how much they are driven by the exit multiple."

Damodaran was also blunt when comparing Facebook with its older rival Google. When asked if Facebook had anything to learn from Google, the professor quipped, Zuckerberg definitely has a thing or two to learn from the Mountain View-based search giant. He says Google is an example of how to build a great idea into a great business.

For instance, Facebook shouldn't have let General Motors go a few days before the IPO. The buzz is also that Facebook is so arrogant that sometimes it doesn't return even client calls, while Google, on the other hand, has a strong operational team, and a professional organisation. "Mark Zuckerberg is a very smart guy, but I am not sure if he is a smart business person," says the Stern professor.

He also says any business has to be built on economics 101, adding, social media is not a business in itself, it's just a way to deliver value, while the business fundamentals remain the same for every company.