We’ve seen lots of talk recently about whether there is another technology bubble going on, with LinkedIn’s super successful IPO, and shares of Facebook, Twitter, et. al. trading on secondary markets at multibillion dollar valuations. I lived through the first dot.com bubble in 1999-2001, and based that experience I am saying right here, categorically and emphatically, that we are definitely in another bubble. I will add some caveats at the end, but listed below are my top reasons for calling this a bubble. Every single thing I list below also happened in 2000, and made rational observers then realize that we were in a bubble. The more things change, the more they stay the same.
A) Insanely high valuations with no reasonable relation to the metrics (revenue, income) of the company (LinkedIn, Groupon)
B) Retail investor hunger for tech stocks. Back in 1999, we were all talking about Joe Kennedy’s famous line: “when you get stock tips from your shoeshine boy, it’s time to sell.” When the public is hungry to invest in a category, it’s a bubble
C) Farcical metrics. In the dot.com era we were supposed to look at eyeballs, not revenues. Now Groupon tells us that we should ignore marketing costs and look at “adjusted consolidated segment operating income”
D) The emergence and venture funding of many copycat businesses. How many flash sale or social coupon businesses do people need? And what about Color, which raised $41 million to launch yet another iPhone photo sharing service, and reputedly only shared 5 photos during the iPhone developers conference and had its president leave within months of launch?
E) Especially the emergence and venture funding of narrow vertical copycats. For example, Juice in the City is Groupon for moms, Pawsley is Facebook for dogs, Everloop is Facebook for tweens (who will, by definition, leave as soon as they are old enough to join Facebook), etc. Anyone who lived through the dot.com remembers “vertical portals.” That didn’t work out so well.
F) Society and entertainment figures or kids fresh out of Stanford and Harvard business school as entrepreneurs. (Juice in the City, Rent the Runway, Ashton Kutcher.)
G) Venture funds you’ve never heard of leading rounds in vertical copycats (Juice in the City funded by HU Investments and Tandem Enterprises)
H) Companies you’ve never heard of buying prime time TV commercials (Peel)
I) Ridiculous and nearly identical company names (Buzzr, Socialzr, Apptizr etc.)
J) Weekly launching of new “incubators,” in which people, some with limited experience, will mentor new companies in return for some equity (Growlab, Capital Factory). Or one incubator, 500 Startups, that funded two nearly identical companies: StoryTree and Vvall.
K) Putting a tech sheen on non-tech companies so that they can raise money at tech company valuations (The Melt)
L) Features posing as companies. A clever little web widget, even a useful one that gets a lot of users, might not be enough to support a viable company. And starting companies that you know can only succeed by being acquired is a classic bubble move. For example, StumbleUpon, Blippy. Actually, Blippy alone is enough to prove my bubble hypothesis. Only in a bubble could that company have even existed.
Now for the caveats, or counterpoints:
As many have noted, some of these companies, particularly the big ones (LinkedIn, Groupon) are generating real revenues. Back in 2000, revenues were a rare thing. However, I should note that neither LinkedIn nor Groupon are particularly profitable. Neither is Pandora. Twitter still doesn’t really have a revenue model. The random widgets and apps that are raising money? Not so revenuefull.
There are more customers now. With the spread of broadband and smartphones, an online business has a much larger base of potential customers than in 1999. That means that the same capital investment can, theoretically, be spread over a much larger revenue base.
This bubble is focused on consumer-facing internet businesses. Not all tech companies are being lifted by the bubble. Microsoft, Google, Amazon and the ilk at still trading at normal to relatively normal valuations.
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