Home >Money >The web 2.0 economy is in a real free fall

Blogging service Twitter’s recent $35 million (Rs174.7 crore today) fund-raising from Benchmark Capital, Institutional Venture Partners, Spark Capital and Union Square Ventures valued the company at $250 million, or half of what it was looking for three months ago. And social networking darling Facebook recently valued itself at one-fourth of the valuation implied by Microsoft Corp.’s offer in 2007. But these impaired figures could still prove to be overly optimistic.

Absurd valuation: Twitter founders Biz Stone (left) and Evan Williams at their San Francisco office. The company currently has zero revenues. Jeff Chiu / AP

Taking a deal now that values it at 50% less just three months later may seem painful, but its infinite multiple still looks like a bit of Web 2.0 bubble optimism.

Oddly enough, Twitter may have been smart for turning down Facebook, which calculated its offer on the Microsoft-implied $15 billion valuation, rather than its own, more recent, internal calculation of $3.7 billion. This may not be as absurd as Twitter, yet Facebook’s annual revenues are only about $300 million.

While the revenue multiples attached to Twitter, Facebook and other Web 2.0 companies seem silly, they may come to represent the salad days. Online advertising, the backbone of these firms, appears to have stalled. Display ad spending is now expected to grow less than 9% this year, down from 15% projections six months ago, according to research firm Emarketer Inc. Some analysts even see that spending shrinking. Investors were seduced by the prospect of growth. If it reverses, the companies’ remaining starry-eyed backers will have to slash their valuations.

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