Interesting points, stats and quotes from a Business 2.0 article about whether or not we’re seeing a bubble.
1 - Few Companies Going Public
I think one major positive about this time around is that you are not seeing bad companies go public. It’s not like public investors are showing an appetite for bad companies with no track record. That removes a major driver in creating a bubble environment. In the 1995-2000 era, companies would get VC money and file to go public within a year, sometimes less, that created the bubble environment.
Very few companies have gone public, even solid companies like IGN (disclosure: I used to work there briefly) that filed to go public opted for a sale. Of course, IGN was not profitable, so maybe that is why.
2 - Acquired Companies Are Quality Companies
The outliers that get acquired at high prices really are the top performers who manage to either develop a superior technology or build up an audience (YouTube, MySpace). Usually it’s the latter. The former (technology) is relatively cheap to develop, with open source technology more prevalent than ever, it costs little to build and scale something. We built a search engine, and a good one at that at a fraction of the price that the giants spend on search. Of course, our products are not directly competitive to theirs, they’re complementary. So in many cases, companies do not even raise financing, they grow and eventually independently; this is another reason why it’s harder for a bubble to form.
The equivalent in real estate is cheap financing, easy mortgages and an excessive speculative environment (flippers). It’s not a coincidence that the bubble moved away from the stock market onto the real estate.
The best signal that we’re not in a bubble is that the VCs of even the most successful firms realize all of this and the exits they encourage help these companies become divisions, applications or features within a greater company. Think YouTube, Reddit, Myspace and many others.
Of course, that’s the exit.
3 - VC Activity Far Lower than 2000’s Levels
When it comes to entry points, sure, VCs are getting giddy. But giddiness alone on that front does not suggest a bubble. If the VCs have money to burn and see entrepreneurs they get excited about, why not place/accept the money if you’re a VC/entrepreneur.
I don’t like to say anything negative about others, but yesterday I read than Zvents, an events planning company, got $7 million in funding. At face value, that is absurd. Then again, there’s a lot under the hood that gets VCs excited:
- Ajax
- local search
- behavioral targeting
Ajax is a wonderful tool that is commonplace in many applications (Gmail being one). You see that local search is a $1B market, and total local advertising is a $100B market, so funding an “online event planning startup” - that can tap into local search for example - is not crazy per se. I personally think it’s still a lot of money for what they do.
VantagePoint Venture Partners led the round with previous investors Red Rock Ventures and NetService Ventures Group participating; David Carlick of VantagePoint Venture Partners and Laura Brege of Red Rock Ventures are joining the Zvents board. Again, these are experienced VCs, but you know the saying: “if everyone else jumps…”
What is a Bubble Pocket?
All to say, I think this article has great points but the bottom line is that there will probably be “bubble pockets” in segments.
Earlier this year, I saw a bubble pocket in video file sharing sites. Google buying YouTube popped (read corrected) that segment. If a VC wants to invest a video file sharing site right now, mark my words: they’re not demonstrating “smart” money traits. Again, they know something I don’t but Google + YouTube will make it hard for others to have any traction in the space. The other, existing players in video file sharing will have to adapt. So the market auto-corrected itself. Will there be more file sharing sites getting money? Of course. But less and less and less.
Right now, you are also seeing a bubble pocket in social networking as well. The analyst in the article below is 100% correct: social networking is a feature, not a company. There are more than enough social networking “companies” out there, there are even those who supply social networking applications, features and tools that any company can include on their site (though that does not mean they should).
4 - Emphasis on Cash Flow Profitability
But, these things correct themselves now because there is so much money online that economic determinism leads a company with the wrong business model to adapt and change to chase the deals to bring in money. In other words, just because a VC is on board does not mean that a company will push back profitability, if anything, they will have to become cash flow profitable sooner.
This, again, is another reason why we’re not in a full-blown bubble.
Enough pontificating, read on:
Venture firms have put a total of $455.5 million into 79 [Web 2.0 companies] during the first nine months of the year, according to a study released on Nov. 7 by market researcher VentureOne, which is part of Dow Jones & Co. That’s more than twice the amount of money that was invested in such companies during the same period in 2005.
(…)
Sequoia has been one of the most active investors in Web 2.0 companies. According to VentureOne, the firm has put money into 14 such deals between 2001 and this year. Only Draper Fisher Jurvetson and Benchmark Capital have had more, with 15 each.
(…)
“This is scarily like 1998 in some ways,” says David Card, a senior analyst with Jupiter Research. “There’s easy money out there, and there are some bad ideas getting funded.”
In particular, he points to the dozens of social-networking sites that are popping up, in imitation of MySpace. “I’m highly skeptical about social networking,” he says. “I think it’s a feature. It’s not a business.” MySpace, he points out, isn’t even that good as a social-networking site. Rather, “it’s building itself into a youth portal,” he says. “It’s a Yahoo! for youth.”
Some $19.5 billion was invested during the first nine months of this year, according to VentureOne, indicating that total investments for the year will come in at around $26 billion. That would be up slightly from the $24 billion last year. But it’s still a far cry from 2000, when the venture firms threw $95 billion into companies.
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November 9th, 2006 at 11:51 am
[…] => I think that this is the best time to be an entrepreneur. Capital is available, technology is cheap, marketers of all sizes are rushing to spend their money online, you can pick up the phone and get anyone from an established, multi-billion company on the phone. Yet, we’re not in a bubble environment either. – A feature does not make a company, and we have a lot of great features out there…if you are building a feature, you should sell it. If you are building a next Google, you should not sell it. […]
November 10th, 2006 at 10:07 am
[…] Blogs and the Web2.0 Bubble (click link to read full blog post) from Fred Stutzman I’ve recently become convinced that the Web 2.0 bubble, long thought nonexistent, is now upon us. However, it wasn’t the recent rash of implausibly extravagant fundings or the wonderfully humorous “Top Ten Lies of Web 2.0” piece that turned me; rather, it was some old-fashioned thinking about how information flows through markets……. […]
November 11th, 2006 at 10:36 pm
[…] We’ve already written about how we are not in a bubble. With Nasdaq at 2,500, cumulative VC activity being a shadow of 2000-levels and deep-pocketed marketers shifting their advertising dollars online, the likelihood of us being in a bubble is slim. […]
December 4th, 2006 at 1:43 am
[…] Non c’e’ bolla, forse qualche bollicina. Panorama frizzante? Attenzione alle tasche. Non credo pero’ che indice della bolla debba essere la discesa dell’azione Google. Chissa’ se c’e’ qualcuno altrettanto attento all’hype generato dall’attesa di nuovi farmaci, dati per buoni prima dei test. tags: bubble 2.0 […]