Bubble, bubble, bubble – In Private Equity not Web 2.0 (Classic)

This is the first in an ongoing “Venture Files Classics” written by former Venture Files Editor Steven Fisher. The selections are chosen for historical reference as well as a notorious ability to be right. The original post from January 12 of 2007 can be found here

Being a serial entrepreneur I have been through many business cycles, but the Internet boom of the late 1990’s was an extremely heady time. People were so enamored with what the Internet could do, every one really believed that the old rules didn’t apply.

The reality was that those rules applied more than ever and with the crash in the early part of the century we have tried to learn our lesson.

With these new companies deemed Web 2.0, everyone is expecting another bubble. So many of the same types of companies have been funded so there are bound to be consolidation and just plain failure.

According to Michael Arrington, his entry “Bubble, Bubble, Bubble“, the despite the fact that some companies are failing, the sky is not falling.

In fact I would call this time around the ol’ startup track “saner, saner, saner”.

Despite many of these companies basing their success on being an aftermarket for Google, the smart ones I think many people know that you have to be in this to create a real enterprise and one that makes money. It is not so much about the VC’s but about the ability to use the low cost and barrier of entry to innovate.

But the Dead Pool is not cool

I think that the blog A VC gets it right his counter points on “Building It Up and Then Knocking It Down” are right. He says “over hyping young companies where people are working their butts off and then throwing them overboard quickly into a “dead pool” when they fail is not healthy.

I believe it is dead wrong to put this up there. It just feeds the fire for the chicken little’s of the world. Mike Arrington has known successes when he co-founded helped flip Achex and sold it to First data. I don’t know if he has experienced building a company from scratch and having it fail, many times from circumstances out of your control.

But there is a bubble developing and not where you think…..

The bubble is not with companies it is in the private equity market itself. The model of funding and the way people are evaluating companies is changing. The way investors look at companies is not based on a fast IPO but aligning it to be a sweet acquisition target.

This is helped in no small part since most VC’s invest like they are teenage girls. “Oooo, you invested in a video sharing site, I want one too! You put $5 million into social networking for eco-friendly baby boomers? Find me one so I can get one too!!

Here is how I got there:

  1. The amount of money chasing deals have lightening strike twice to find that repeat of unrepeatable past returns is growing rapidly
  2. The number of opportunities are declining and there are too many copycats plus the cheap money is pouring out to fund them.
  3. Not enough VC’s to serve on boards effectively and make the existing investments get to a proper exit
  4. IPO market is still not there and there is and there are only so many acquisition partners
  5. Higher prices of entry and lower returns

What I don’t know:

  1. When the IPO market might be friendly to tech stocks
  2. If investors will broaden their portfolio choices to get their money working in unique ways
  3. If funds might start giving their money back

Only time will tell if this comes to pass. If you have a good idea, the money is out there but might not be for very much longer.

Crystal Ball? 2-3 years or mid-2008 this is gonna come to a head. Only time will prove me right or wrong.

Editors Note: At the end of 2008, we do now know that the economy has imploded, not simply from web valuations. In fact, web valuations hardly played any part like they did in 1999-2000.

In fact, the web sector has seen much less damage, than the rest of the economy. In fact, there are still investments taking place, if devalued. A series investments for web companies typically range in the $1-2M range which in the larger picture is fairly small. Biotech companies, for instance, typically pull in around $20M for a Series A round.

That does not make the web sector immune, and in fact, Steve is correct in recognizing that there would be a bubble coming, and that it has arrived.

Venture Files Tech Predictions 2008

Well kids, its that time of year again. Resolutions and Predictions.

As for resolutions, I need to lose weight but that will probably not happen so I will endeavor to breathe more regularly. I can definitely accomplish that.

With that out of the way, let’s talk about Predicitions.

From my posts last January here and here, I got a few hits (Vista would suck) and a few misses (Facebook will become the new Friendster).

So let’s talk about 2008….

I don’t generally see a theme this year except for “grow what you have”.

Apple – Since Macworld is right around the corner I don’t think we will see any real new products but rather a grow what they have to meet their projections. This means upgraded iPod Touches, iPhone 2.0, iPhone SDK, upgraded Apple TV, patches to Leopard, improved Cinema Displays and upgraded Macs/Mackbooks. The only thing I could see would be integration of their multi-touch technology on laptops (like the rumored sub-notebook).

Microsoft – Let’s face it, Vista blows. It’s slow, doesn’t have any real innovation under the hood and takes more horsepower to run. I predict they will continue forcing it down people’s throats and in revolt people will continue to order machines with XP. On the other side of the coin, the Xbox is rocking and I predict they will announce an integrated Windows Media Center/IPTV version with HD-DVD to compete with the Playstation 3. They have a real opportunity to own the living room since Apple TV has flopped.

Web 2.0 in general - Ok, hype over. Game over. Most “Web 2.0″ companies will go into the dust bin of history because their marketing strategy or ideas just didn’t pan out. Also, as more companies adopt these technologies into their “Enterprise 2.0″ strategy there will be less of a rush to create another social network or AJAX-ified web site unless it has real value. Side note – kill the term Enterprise 2.0. The enterprise hasn’t changed, the apps have just gotten easier to develop.

Twitter will get bought – it is a cool tool but not a lot money to made behind it. It needs to be part of a bigger whole. They also need better infrastructure because they crash whenever there is a big tech conference. CES will be a big test for them.

Pownce will die – Twitter won this battle. Game over.

Digg will get bought - After rumors of a sale for the last 18 months, they finally get bought by a media behemoth. Sale price? $300 million.

Yahoo will continue to struggle and have massive layoffs – Yahoo didn’t change much with their executive restructuring and they have really sucked at integrating their products. They are going to get hit with lower stock prices and will have to cut the fat out.

HD-DVD and BluRay will not have a winner, still – This year is just going to continue the fight with hybrid drives getting cheaper so by 2009 the choice will be irrelevant.

Google’s honeymoon with Wall Street will end – With the acquisition of DoubleClick there is more of a chance for Google to fail. Along with it trying to change to many sectors, Healthcare and Energy to name a few, it will need to shore up its core competencies before people start to trash it and the stock will be worth half what it is today.

Facebook – They are a necessary evil right now and their beacon debacle will need to be fixed in order for them to go IPO. They will be the new IPO darling as analysts are ready to trash Google.

Well, that should do it for the major stuff. Not too radical but it will be an interesting 2008 with the potential of a recession on the horizon that could make all of this moot.

Please leave comments on things you think I missed or got wrong. I want to hear from you.

Writing for B5 Media – Come on over to Startup Spark

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The blog is called Startup Spark and is similar to Venture Files but is a broader version on all types of entrepreneurship.

I invite you to check it out and subscribe. This blog will continue but in the coming months I will be focusing this blog more on innovation topics and will be unveiling a new design.

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