Dotcom Bubble 2.0: Are we headed for another hangover?
newsweek.com
newsweek.com
This was when the average web server was $25k and 1/25th as powerful as what we're buying for $4k now. This was back when you needed millions in Oracle licensing to run and scale an ecommerce business. Bandwidth costs were fifty times what they are now. This was when businesses spent hundreds of thousands of dollars on lavish parties. Flooz spent $8 million (out of it's $35m) just on TV advertising. Pets.com spent $1.2 million on _ONE_ superbowl ad. Now that's the stuff!
It checks out!
A bubble is related to valuing stocks for more than they're worth due to irrational expectations by the buyers of stocks, not necessarily fraud at the companies invested in.
In other words, you can have fraud without a bubble and vice-versa, SOX is mostly about good accounting practices, and corporate oversight and should probably be seen in the light of reducing the chances of companies overstating their revenues by 'creative' accounting practices without being caught at an earlier stage.
The internet bubble would have happened regardless of these rules and regulations being implemented at an earlier date, it might have collapsed later or slower once the investors realized that the internet wasn't going to be some kind of magical solution to all the worlds problems. Typically in a bubble you'll see prices go up and up and investors with little or no idea of what they're doing are lining up to buy stocks that have very little intrinsic value at prices higher than seems reasonable / responsible.
If the companies that they invest in commit fraud then that's going to make matter worse but a bubble can happen without any action on the part of the companies invested in, it is mostly an investor issue, fraud is mostly a corporate issue.
All those accredited investors in PRIVATE companies should definitely take their money out and hand it to a large bank who will definitely not handle it as poorly as they previously did.
Even if there is a Web 2.0 bubble the size and scope of it is definitely not comparable to the first bubble, or the subsequent real estate / CDS / MBS fraud. If you're looking for a bubble look at the NYSE / NASDAQ or basically any investment a bank could possibly put their fed money into.
Honestly, the problem is that the USV VC model doesn't work well when you can put a company together for $15,000. That environment much more favors the YC model, the problem is that once startups reach USV from YC they've already established traction and generally have a money making funnel that is ready to be primed with a large amount of cash. Once a company has traction it changes the valuation formula greatly. The reason that a 3 person startup in 6 months has higher valuations than in previous years is because the risk / reward ratio is greatly changed from previous years. Valuations are higher because the new startup life cycle is much shorter. You no longer need $5 million just to see if your idea is viable. With the amount of cash that the big boys have on hand and the difficulty of a modern IPO I think the industry is headed towards more informal version of Japanese style Keiretsu model where startups are using resources of larger parent entities rather than the more formal VC/IPO.
YC has taken the bottom end of the market from USV, so USV sees higher valuations because YC has already taken the risk and weeded out a bunch of companies that didn't work out. So from an entreprenuer perspective you'll see both higher AND lower valuations. Once a startup reaches USV it's higher than in previous years but you'll find a lower valuation for your seed round because of YC (and the associated lower costs of startup).
Let's consider growth first. We're talking about Facebook. They already dominate the social network space, with an amazingly high percentage of the potential user base in many countries. There isn't a lot of growing to be done in terms of product base (i.e., number of Facebook users) in those countries. Likewise, Facebook users already seem to spend a staggering amount of time on the site. There isn't a lot of growing to be done in terms of getting people to use the site more and therefore increase the value of ads. Growing into other geographic markets might help, but they have still failed to establish dominance in places like China, so that's far from a safe bet.
In terms of market direction, though, it seems like all the most likely routes are downward. There must be at least three obvious risks of a business-threatening scale:
1. Advertisers could find a more efficient mechanism and desert Facebook en masse.
2. An alternative social network, or simply other ways to entertain yourself and keep in touch with friends, could cause users to desert Facebook en masse. (Keeping in mind that most of Facebook's power comes from its viral, highly networked nature, this is a serious risk: you only have to lose enough users that people can't rely on sending out news/invitations/whatever via Facebook and assume friends who aren't on it are weird.)
3. Privacy regulators could clamp down more than they already do as public awareness of the related issues continues to increase, underming the whole targeted advertising business model.
I suppose that's all relatively sane compared to Zynga, though, where the leading P/E isn't quite as bad but their entire business model is effectively based around the continued dominance of Facebook or a similar platform and their ability to keep people's interest in the long term.
Remember: this time, it's different. It's always different.
That's what Fred Wilson and Dan Lyons are smoking. It has to be. No one could seriously be suggesting that we're in a bubble.