Why many companies are now raising HUGE amounts of money

Recently we see many companies raising huge sums of money based on amazingly high valuations. I am talking of course of facebook, twitter, groupon, etc.

This post is not about the companies’ valuations. Whether it is a bubble or not, history will judge best.

This post is about why do such companies need so much money, so quickly. I know the rule of “raise when you can and not when you need it” and generally I agree. But I also think that there is some limit to what companies need.

The simple answer is greed. Since valuation is now high companies can get much money for very small portion of equity.

However, if the companies believe that their valuation is real and will continue to grow, what’s the rush?

I think that there are other phenomena that can explain this

Examples:

• Everyone realizes that facebook changed the Net and our lives. However, I do see that many of my friends invest less and less time in facebook or even stopped using it. I see people are less responsive and that “thrill threshold” is  getting higher, while I do see business that market themselves more and more and spam my wall.
  
  In addition, it is clear that facebook changed their focus from finding what they are and helping us people into monetizing in any way they can. Why is that? What’s the urgency?

• Groupon affects much on how people are buying and even more how local business advertise. It is really nice, but what’s the real value to a local businesses that offered coupons? Does it really make an impact in their ability to make more money? Still hard to say.

I think that these companies are now in such a unique time that the success potential still seems freakishly high. The money generation mechanisms reflect (at least in the short term) their ability to demonstrate real income and not just eyeballs model and "this is a new economy... this is not a bubble ...". Then, they capitalized on this potential and can get their hands on very large investments.

Their urgency is stemming from their own realization that their model might collapse.

Facebook still has no real user locking mechanism. Users can abandon it pretty fast if a better social network with better targeted content, friendlier UI and less spam evolve (Skype has shown us how fast people are moving with their friends when they find new value).

Groupon is in a rush since when statistical analysis about their model will become public knowledge, it might prove that the promise is phenomenal. In such a case their value will decline pretty fast. This is not to say that they will not be a good company but they might not become the great next big company that changes demand/supply and advertisement habits.

These companies are very smart to create cash buffers for rainy days. This money is not just for growth, this money is to allow them to find the real model that will help them survive should their promise will not be as expected (and we should expect that).

And we, we are the stupids that provide such ridiculous amount of money for so small an equity jumping in without thinking and hoping valuation will raise infinitely.

Amir