In May 1999, basically a lifetime ago, I made a presentation entitled “Valuations in La-La Land” for Burt Alimansky at what was then called the New York Venture Group, now subsequently renamed the New York Capital Roundtable. I came out on record against silly valuations 10 months prior to the NASDAQ high before the Internet bubble crashed. I am probably at least 10 months ahead of the high again for this new Internet bubble as well. Indeed, I never thought I would see another bubble this soon. Fortunately, it is not of the same magnitude and does not involve nearly as many companies since it is primarily limited to those enterprises related to the social networking and software as a service (SaaS) arenas. Still, for selfish reasons I love that Cornerstone OnDemand IPO!
Why do I think there is a bubble forming again? What are the signs that I see that are similar to what I noted in 1999? Do I find myself listening to Prince’s ”1999” a lot more often these days? Well, yes, but that’s only for nostalgia purposes and has nothing to do with any Internet related bubbles.
Facebook, Twitter and Groupon may indeed have very good business models, but they are in no way worth the tremendous valuations that they are commanding today just as many of the Internet darlings of the late 1990s with good businesses were in no way worth the valuations that they were commanding at that time. Almost all of the high flying companies of the late 1990s have never recovered their pre-crash highs, but some (Amazon and Ebay to name a few) have been able to re-achieve and even surpass their former glory with a lot of hard work. These solid companies represent the great exception and not the general rule, however, and even excellent enterprises such as Cisco remain far below their former glory.
There are a host of factors at work driving the valuation inflation this time around. Once again, too many dollars are chasing too few deals. But this time, it is not because too much money has been raised by venture capital funds and it simply has to find some place to be put to work. This time, I believe much of the money is heading into a few big companies that have serious scale and momentum. The valuation of several of these good, large companies is simply far too high and is driven often by less sophisticated investors participating in the secondary markets handled by SharesPost and SecondMarket. And as in the late 1990s but on a smaller scale, lesser companies are getting funded (often by angel groups) with valuations keyed off of these inflated valuations. A rising tide lifts all boats. Beware when the tide goes out….
Facebook is a solid company, but it is not worth $50 or $75 billion today. In order to double investors’ money, the company would need to become worth $100 or $150 billion. There are fewer than 10 US technology companies worth that amount of money. Even Ebay and Amazon are not among the number worth over $100 billion today!
“It’s different this time.” Mashable co-editor Ben Parr told Silicon Republic that this investment phase is different from the bubble of the 1990s, because Facebook, Groupon, Zynga and others have viable business models and are making money. Members of the public also are more willing to use Internet services than they were before.
“Do I think there will be a day of reckoning? No, I don’t. Will there be a time where some of these valuations will go down? Probably, there’s always a cyclical cycle when you talk about markets,” Parr told Silicon Republic.
But it is never, never different this time. That is the lesson that history teaches us. The valuations are elevated and they will inevitably come down hard. The only open question in my opinion is when the bubble pops. The exact answer is beyond my pay grade, but I would posit 9 to 18 months. The day of reckoning hits when the companies that need to raise money go out for the next round of capital and get pounded or when the big companies try to raise capital in the public markets and find that institutional money managers are not willing to pay the same high prices in the public aftermarket that private investors are paying in the private secondary markets.
The fallout will not be as great this time the bubble bursts. Fewer firms and fewer individuals are involved with this Internet bubble, which will probably be referred to as Bubble 2.0 or something equally clever. In addition, there will probably be hand wringing about “unregulated” private secondary markets and “asymmetric information” and calls for “government investigations” into Goldman Sachs Investment Partnerships and “new regulations” as well. There will probably be a Congressional hearing or two, but not much will change. Plus ça change….
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