Xconomist of the Week: Habib Kairouz Foresees a Valuation Correction

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investments recently in companies like GetGlue in social TV. This is a space we are very excited about. We think it is the next big disruption in media. GetGlue allows consumers to interact with their TV programming by adding a new layer where people use their iPads and iPhones to vote on shows such as “American Idol” or have social TV conversations. We’ve also made an investment in Dashlane, which is an early-stage company that addresses the problems consumers have managing their IDs and passwords on the Web.

X: You have invested in e-commerce as well with companies such as JustFab.

K: We also have two others in New York: Totsy and Bluefly, which was one of the first e-commerce companies to emerge in the late 1990s. We also invested in a company out of Canada called Beyond the Rack. [Totsy in New York is a flash sale site for deals on products for infants, kids, and parents. Bluefly (Nasdaq:BFLY) in New York is a fashion e-tailer. Beyond the Rack is an online shopping club for apparel, consumer electronics, and home décor.]

X: Given your concerns about valuations, do you believe we are in a bubble?

K: I’m not necessarily concerned about a bubble phenomenon. In my mind what happened in the late 1990s was extravagant valuations and the huge promise of value creation [based] on the commercialization of the Internet. People were putting together billion-dollar valuations while ignoring cash flows that weren’t going to happen for 20 years.

Today you have Facebook, Groupon, and Zynga as rising stars of Web 2.0 value creation. All these companies have unbelievable scale in terms of revenue and that’s only from the past five years. We’re all criticizing what’s happened to those companies post-IPO, except for maybe LinkedIn.

People are losing sight of the fact they are generating millions and in some cases billions of dollars. That is incredible value creation. Most of them are profitable or heading towards profitability. I don’t view that as a bubble. Where we worry is people putting very high valuations on some of these companies assuming the growth rates will continue as they have in the past.

There’s nothing wrong with a company that grew 200 percent in year one, 100 percent in year two, 80 percent in year three, and is tapering off to a 40 or 50 percent growth rate. When you assume they are going to continue at 100 percent for the next 10 years and base the valuation on that, that’s where we [Rho] get off the bus.

I don’t think it’s a bubble; it’s a valuation correction that reflects the fact that some of these companies will have lower growth rates in the future. Some of them will not be as successful as their competitors. People tend to extrapolate valuation by pointing to one success story in a very specific market and assume that others will be able to replicate it. That’s what I worry about in the late stage round. I think we’re already seeing a correction.

The other thing we worry about at the seed level is a lot of people have invested just … Next Page »

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