Is there a bubble in tech?
It may not resemble the first .com bubble, but the valuations being
given to some of the hottest internet startups, from ‘mature‘ companies
including Facebook and Twitter all the way down to upstarts like Quora, is producing
plenty of skepticism.
The bubble/no bubble debate is a heated one, but one man who credit his fortune to an acquisition windfall in the first .com boom has a different take.
According to Mark Cuban, who sold Broadcast.com to Yahoo in 1999 for close to $6bn, what we’re seeing today isn’t a bubble, it’s a Ponzi scheme. peHUB quotes Cuban:
Remember the old chain letter, where you put up some money, then you got other people to put up some money, and you gave it to the people who were in the deal before you? That’s what’s happening today.
The early [VCs] are getting the new [VCs] to invest enough money at high enough valuations that they get most, if not all of their money back. Then the next round [sees] someone else invest more money at a higher valuation, returning cash to the last two rounds of investors.
By the time you get to the last [VC] standing, those last few rounds hope they can get a return from the public markets. That may be very tough. But the only players really on the hook are the guys from the last rounds. Just like in a chain letter.
Given the large sums of money that are being tossed around for shares of Facebook and Twitter on an increasingly frequent basis, Cuban’s argument is hard to dismiss out of hand.That doesn’t mean, of course, that there are plenty who would disagree with it.
Some, like YCombinator’s Paul Graham, don’t see a problem at all:
What’s happening now is a lot more localized. A few professional investors are paying higher valuations for startups than they were a few years ago. But the number of participants and the amounts of money moving around are both very small compared to the 90s. Plus the companies are better.
In the 90s, it was the dumb leading the dumb: smooth-talking MBAs were raising money from hapless LPs and investing it in startups run by other smooth-talking MBAs. Now it’s Yuri Milner investing in a company run by Mark Zuckerberg.
In my opinion, Cuban’s reasoning seems a lot more sensible. The question isn’t whether companies like Facebook are “better” than their now-deceased counterparts from a decade ago, or who is raising money from whom.
The question is how much companies like Facebook and Twitter are really worth, and whether or not the newest investors in them are motivated more by their long-term potential or by making a quick buck selling to even greater fools (perhaps retail investors) in a year or two.
If VCs, investment banks and institutional investors want to invest billions in a handful of high-profile startups at exorbitant valuations hoping that they’ll avoid being the one left standing when the music stops, more power to them.
There’s an old saying on Wall Street, “Pigs get fat, hogs get slaughtered.” The primary characteristic of a hog: unbridled greed. Right now, anyone paying through the nose for a stake in Facebook or Twitter in hopes that he or she will make a quick buck when someone else invests at a higher valuation looks more like a hog than a pig.
But none of this really matters unless you’re a VC, investment banker or institutional investor, or can’t wait to invest your entire retirement savings in a Facebook IPO that values the company at $500bn.
As I wrote before, the good news is that whatever you want to call the froth, it has little to do with the internet’s viability. That’s because the rest of us don’t have to participate in the game to try to capitalize on digital opportunity.
Unlike in the first .com boom, when the value of the web was largely perceived to be correlated with the immediate prospects for overhyped, overvalued companies, the internet’s worth today isn’t determined by the value of Facebook, Twitter or the ‘next big thing‘.
Plenty of entrepreneurs, developers and companies are profiting daily from the internet using proven online business models, and the vast majority of them wouldn’t lose a wink of sleep, or a penny, if Facebook and Twitter folded tomorrow.
Photo credit: Shiny Things via Flickr.