Sunday, November 25, 2007

Today's Globe column: What Bubble?

Today's Globe column considers the question of whether we're in the midst of another tech bubble, and if so, can it survive the economic downturn some are predicting for 2008. From the piece:

    Bubble deniers think continued increases in Internet usage and online ad spending will keep some companies cruising through any recession or economic slowdown. But bubble believers say that's about as likely as the Supreme Court successfully repealing the law of gravity.

Here's the video, shot at this month's TechCrunch party in Boston, followed by some perspectives that got snipped from the column for space reasons. (And a few comments that arrived too late for my deadline.)

New York venture capitalist and blogger Fred Wilson wrote via e-mail that he is “long-term bullish on the Internet, but short-term cautious, and also very aware of the problems in the U.S. economy and the impact they could have on the sector.”

Here's the full text of an e-mail reply I got back from Guy Kawasaki, a bubble believer:

    We're in another bubble for sure. What will cause it to burst is anything that causes companies to curtail online advertising. When you read about a company offering Porsches to people who helped it recruit people, it's time to short the market.

And from VC and blogger David Hornik, a bubble denier:

    I think there has been talk of a new bubble since the day that VCs began investing in consumer internet technologies again. The bubble of the late 90's felt great on the way up and horrible on the way down. But it was inflated drastically by a public market for highly risky Internet stocks. This time around, although there is a great deal of enthusiasm for consumer Internet startups in the Venture Capital community, there is no public market to further fan the flames. So to the extent that money is lost, it will all be the money of professional investors. And, to my mind, that will never constitute the sort of bubble that causes far reaching pain in the event that it pops.

Alan Philips is the CEO of Frame Media Inc., a Wellesley start-up that plans to deliver images and news for free to a new generation of Net-connected digital picture frames in consumers’ homes (sprinkled with a few ads here and there.) His company raised $2 million earlier this month.

Philips says he isn’t worried about how much consumers will or won’t spend buying gifts this holiday season, the first time that Net-connected picture frames are widely available at electronics stores. The word he has been hearing is that many retailers are selling out of the frames, which start at about $199.

Stephen DiMarco says that “it’s a very bullish time if you’re in Internet ad sales, marketing, or analytics,” the arena where his Boston company, Compete, Inc., plays. “It’s bad times if you’re a mortgage broker.”

“Is anything going to slow down Google’s growth?” DiMarco asks. “It doesn’t look like it, and Google is a pretty good proxy for the rest of the industry.” (Those could prove to be prophetic words from an entrepreneur whose last company, the Web development agency Zefer Corp., was slated to go public in the spring of 2000, but decided to wait for the stock market to improve. That didn’t happen, and Zefer doesn’t exist today.)

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Blogger Mike Feinstein said...


It’s only a bubble when you have valuations that don’t relate to underlying value. Perhaps the Facebook valuation paid by Microsoft is in that category, but you could argue that they have strategic value to Microsoft, too. Although valuations are up, there certainly aren’t widespread sky-high valuations being paid in the public markets (although I still think that Google is too expensive – and I’ve been wrong about that since they went public!).

Don’t confuse activity with a bubble. There is a lot of start-up activity now, which is very healthy. Most companies are being started with a very modest amount of capital. That is precisely not a bubble. Even first round venture financings are generally modest. Some later venture rounds are high priced in the best companies, but the IPO prices and M&A prices, generally, are within reason. I don’t think it is a problem if there are many, many companies that start with a $1M of capital to see what they can do. We need this type of environment to foster entrepreneurism. Many of these can either sell off at a price which recovers capital, or at least minimizes the loss. They certainly won’t break the backs of the investors.

Compare this to 1999/2000. You couldn’t justify any prices, public or private. I remember a local networking company that raised a first round, just based on a set of slides, of $20M at $120M pre. Companies didn’t have a lot of revenue and had multi-billion dollar valuations. You don’t see this type of activity now. You can always find one or two deals that don’t seem to make sense, but that’s not a bubble.

I do think that VC returns are going to continue to be compressed as there is pressure to over capitalize deals over time, and later stage rounds are generally too big and too expensive. There aren’t enough EquaLogic-sized exits to justify big and expensive late rounds. But, these are at least done in companies that have a real business. So, the returns may be low, but it isn’t indicative of a bubble like we saw at the turn of the century.

November 25, 2007 12:12 PM  
Blogger Peter Glyman said...

Hey Scott, Great article by the way. I agree with Mike, Hopefully he's got companies like Geezeo in mind when he mentions "many of the companies getting started with modest amounts of capital" ;-)

I think you'll see that many of the startups around town...the ones you see at WebInno, Tech Crunch, Tech Cocktail, OpenCoffee are getting off the ground with minimal investments, and for the most part have much more then a "we'll give it away and make it up on volume" business plan. Most have solid user acquisition strategies and a revenue model.

Bubble or not, it's an exciting and amazing time for the web, innovation and for entrepreneurs. The cost of doing business is incredibly low and with the right team...almost anything is possible.

I know we're glad to be a part of it.


November 26, 2007 9:09 PM  
Blogger John said...

To me your question is whether or not this level of activity is sustainable - ie its expanding and can it continue to expand or will it contract due to some currently unforseeable events. Certainly the current sub-prime crisis should tell us something about how external factors come into play in markets in general.

As an entrepreneur, my latest indication of this was a conversation I had with an individual on the Harvard Startups board. I was looking for more people to become involved in a startup in tracking favors owed and given via online networking and it turned out this person was a construction architect of all things. When you have architects trolling the startup boards and interested in joining an internet startup not related to housing - I feel that the level of startup interest is reaching a peak.

I have to believe this indicates a pending meltdown in the economic business sense though as more shaky business ideas will be launched without adequate planning for potentially difficult times ahead. Overall this should be good as it will reduce unreasonable expectations that have been building in the sector.

John Lohavichan

November 28, 2007 10:37 AM  

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