Is "Collateral Damage" from Economic Bubbles Inevitable, Necessary, and Useful?
According to the old saw, markets are made by differences of opinion. If that's the case, there is a real market around the question of whether we are approaching another bubble in the high tech information and social networking sector.
Several respondents to this month's column argued that we are. As Kamal Gupta put it, "Facebook's valuation was explained to me by people I consider smarter than me as valuation of its database. The same thing is being said about Whatsapp. So now Facebook has a huge mine of data. Reminds me of the California Gold Rush. The only ones to make money out of it were land owners, shovel vendors, and Levi." Tom Dolembo added: "It's like the financial groundhogs have all come out and didn't see their shadow. There is a recent sudden effort to monetize concepts, many of them apps for Android and IOS, driving doubtful revenue models in packed market segments with little differentiating code."
Nol Perreira asked, "What will prick the bubble? The timing of that is, one might say, whimsical. I think the initiating event (which could occur at any time) will be something that awakes the investor that there is a real time value to money, and it might be better to get some current returns…." Konstantin Tryapitsyn suggests what might prick the bubble. "I personally believe that some natural limits always exist and that customer behavior can change. The burst will be when we will observe that consumer patterns are changing."
On the other hand, some believed that things that have changed since the 2000 bubble may make another one less likely. Ofer Vexler said: "Unlike (the) situation in (the) 90s, today's Internet (mobile) businesses and users (have) already evaluated the benefits… (and) … analysts' valuations can be more predictable …" Shankar N. Mandapaka added: "The earlier dot.com bubble was due to lack of proper valuation mechanisms to capture traffic and customers. In the last 10+ years there has been an increase in the use of (the) Internet, and users are well aware of the importance of certain applications and services." AIM agreed that: "compared to dot.com bubble days we are living in a much broader information based society that necessitates transparency…not only is the quality of information better but the speed as well."
Ralflippold felt we will face a bubble at some time, but suggested that bubbles have a positive side to them, that they are on one side of a fine line, a line that is beneficial to walk. As he put it, "Doing business as 'normal' would never bring any innovation on the table. Disrupting through economic bubbles all the time would never establish the stable foundation that is necessary for the functioning economy." The question is, "how can they (be) made stable and innovative at the same time?" This more constructive view of the bubble phenomenon in markets suggests a question for further consideration.
Is "collateral" damage from tech bubbles inevitable, necessary, and useful? What do you think?
The recent purchase of WhatsApp by Facebook for a reported price equaling $345 million per employee prompts me to ask the question above. It also brings back vivid memories of the last bubble, seen from the inside.
In the spring of 2000, signs of the end of a dot.com bubble were all around us. As a director of an Internet-based startup, PlanetFeedback.com, I met with our board in the only meeting room for that purpose at Flatiron Partners in New York. Companies in which Flatiron had invested scheduled the room, one after another, for their board meetings.
In our case, we had moved our meeting to New York to discuss growth and the next round of financing for the company. Our leadership, alumni from Procter & Gamble's online operation, carefully laid out plans in which they estimated they would need a next round financing of $30 million. The representative from Flatiron indicated his partners would like to see a proposal. When our CEO replied that he could have something in a couple of weeks, our host shot back, "A couple of weeks! Put something down on a sheet of paper and give to me before you leave today." We received the money in early June, just as the entire high-tech bubble was popping, pulling much of the stock market down with it. In true P&G fashion, our management nursed the money through the worst of the downturn.
The story doesn't end there. On our way out we were introduced to the management and directors of the startup that had the room reserved after us, kozmo.com. Their average age was in the early twenties. Kozmo.com took orders over the Internet and promised one-hour delivery of a wide range of products, including an entire evening's complement of food and videos, with no delivery fee and at a price roughly equal to what one would pay at retail. As it turned out, the business model was really selling $10 bills for $5. But kozmo.com also got its money (including $60 million from Amazon) and managed to run through $250 million of venture capital before shutting its doors just 14 months later. The next time I met the CEO was as a student in my MBA classroom.
During my visits to Silicon Valley before the last high-tech bubble, the yardstick for acquisition price was also price per employee. The use of the measure seemed to subside when investment activity once again focused around startups rather than M&A. But now that the most wildly successful of those startups have accumulated a lot of cash themselves, acquisitions and the price paid per employee are once again fueling headlines. (A better yardstick might be price per user, which in the case of WhatsApp was about $40 for a service with no advertising and a revenue stream of $1 per year from those users not getting it free.)
How will we know when we are near the end of the next high tech bubble? When the Nasdaq finally makes it back to the highs it registered in 2000, perhaps this year? When investors stop cheering acquisitions like that of Facebook's? (They actually bid the price higher the day after the announcement.) When the website kozmo.com announces that it will relaunch soon (which, according to Wikipedia, it did last September)?
When will the next dot.com bubble burst? (Or does even the use of the term, dot.com, date me?) What do you think?