Internet entrepreneurs hoping to follow in the footsteps of giants such as Google Inc. (GOOG) and Facebook Inc. (FB) are finding the prospects cloudier this week as they gather along the French Riviera to schmooze and raise cash.
Executives mingling on hotel terraces for the annual Monaco Media Forum are grappling with tight financing after missteps by industry heavyweights and disruption caused by the rise of smartphones. The landscape has changed for startups looking to raise venture capital, list their shares or get acquired by a larger company, investors and executives said.
"Now it's about reality and it's show-me-the-money time," said Ian Maude, a media analyst at Enders Analysis in London. "There are huge changes in the venture-capital market. Investors are now more concerned about returns."
Facebook's stock has plunged since its May share sale, Google has missed analysts' estimates and social gaming company Zynga Inc. (ZNGA) lost at least nine senior managers as its price fell more than 75 percent since its December offering. With consumers increasingly shifting to smartphones from personal computers, ad-supported sites are finding it especially hard to generate new revenue, said Maude.
'Overpriced Market'
For venture-capital investors, "the market was overpriced in the first half of this year" as Facebook's pre-IPO valuations filtered down into the rest of the technology world, Tomasz Czechowicz, managing partner at Warsaw-based tech investment firm MCI Management, said in Monaco. "Right now the market is at a good balance."
The Monaco Media Forum in Monte Carlo attracts executives from Google, Facebook and Microsoft Corp. (MSFT), along with venture investors and startup entrepreneurs looking to pitch ideas. The three days of speeches, seminars and extended cocktail hours cover topics from measuring online audiences to appealing to tech-savvy members of the "millennial" generation.
Startups in Monaco this year include blogging platform Tumblr Inc. and Thrillist, which curates digital lifestyle guides for big U.S. cities.
For new businesses basing their models on advertising, "now you can only do niches," such as targeted services for certain professionals, Czechowicz said.
Increased scepticism about tech companies' prospects has a precedent. Following the 2001 dot-com bust, which followed flops such as Pets.com, investors also became more conservative.
'Tougher Questions'
"I'm sure everyone is asking tougher questions" now, especially about later-stage companies considering an IPO, said Daniel Waterhouse, a partner at venture firm Wellington Partners. "People are more critical of the fundamentals of the business."
Advertisers and Web companies struggling to attract cash and users' attention are also finding more difficulty as people shift to mobile devices. Few are yet able to point to a durable strategy for ads on the smallest screens, on which display advertising is less useful.
Online companies are trying a number of strategies to increase revenue and overcome this problem. For example, Google is betting in part on so-called click-to-call features for advertisers, allowing consumers to connect directly with shops or restaurants from their browser.
LinkedIn Corp. (LNKD), the biggest professional-networking site, is developing services for smartphones and tablets to appeal to paying subscribers.
Social Advertising
Prospects may also be brighter for so-called social advertising, which integrates product pitches into users' other interactions online, Jonah Peretti, chief executive officer of New York-based social news site Buzzfeed, said in Monaco.
The advance of smartphones, tablets and other devices with larger screens will drive mobile advertising, said Martin Sorrell, chief executive officer at the world's largest advertising company, WPP Plc. (WPP)
"On mobile it's only a question of time as clients and agencies engage and adapt," Sorrell said in an e-mail. He said previously that WPP would increase spending on Google ads to $2 billion this year from $1.6 billion in 2011.
Questions about the value of investing in the sector follow a run of eye-popping valuations for tech and media companies with slim revenues and hazy business models.
Microblogging site Twitter Inc. raised venture-capital finance at an $8 billion valuation last year, with efforts to raise sales through advertising in their infancy. Facebook this year bought Instagram -- a photo-sharing application with zero revenue -- for $1 billion.
Stumbles by even the most dominant tech companies mean tougher questions for those now trying to break out, said Buzzfeed's Peretti.
"Companies that have very modest revenues are having more trouble than they used to," he said. "People ask, 'Facebook's not monetizing as fast as they said they would, and they're the best, so how are you going to do it?'"
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