
Dotcom Bubble 2.0: Are we headed for another hangover? - curtis
http://www.newsweek.com/2010/12/03/lyons-dotcom-bubble-the-sequel.html
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rbranson
Oh please. Apparently our memories are very short. Foursquare raised $20
million with 27 employees? Big deal. Pets.com got $300 million. Webvan raised
$1.2 _BILLION_ dollars. Remember when everyone was GOING PUBLIC without even
making as much as a dime?

This was when the average web server was $25k and 1/25th as powerful as what
we're buying for $4k now. This was back when you needed millions in Oracle
licensing to run and scale an ecommerce business. Bandwidth costs were fifty
times what they are now. This was when businesses spent hundreds of thousands
of dollars on lavish parties. Flooz spent $8 million (out of it's $35m) just
on TV advertising. Pets.com spent $1.2 million on _ONE_ superbowl ad. Now
that's the stuff!

~~~
eli
Surely there would be many more unprofitable web companies going public today,
were it not for laws like SOX passed after that last bubble popped.

~~~
jacquesm
Sarbanes Oxley had very little to do with the web bubble but everything with
fraud.

A bubble is related to valuing stocks for more than they're worth due to
irrational expectations by the buyers of stocks, not necessarily fraud at the
companies invested in.

In other words, you can have fraud without a bubble and vice-versa, SOX is
mostly about good accounting practices, and corporate oversight and should
probably be seen in the light of reducing the chances of companies overstating
their revenues by 'creative' accounting practices without being caught at an
earlier stage.

The internet bubble would have happened regardless of these rules and
regulations being implemented at an earlier date, it might have collapsed
later or slower once the investors realized that the internet wasn't going to
be some kind of magical solution to all the worlds problems. Typically in a
bubble you'll see prices go up and up and investors with little or no idea of
what they're doing are lining up to buy stocks that have very little intrinsic
value at prices higher than seems reasonable / responsible.

If the companies that they invest in commit fraud then that's going to make
matter worse but a bubble can happen without any action on the part of the
companies invested in, it is mostly an investor issue, fraud is mostly a
corporate issue.

~~~
natnat
SOX compliance is also really expensive for smaller businesses, though, and it
makes IPO's seem like a bad idea unless the company can be really, really
huge. Companies with more than $5B in revenue only spent 0.6% of their revenue
on SOX compliance, while companies with less than $100M spent on average
2.55%. This doesn't really have anything to do either way with a bubble, but
it does disincentivize a company from going public.

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fleitz
Hey look at Web 2.0 and all that private money, almost none of it public, or
with anyone's pension riding on it. Please don't look at Gold, NYSE, NASDAQ or
0% Prime. Those valuations are definitely not a bubble, and aren't at all
based on the money the fed is handing the banks to prop the markets. Yes, it's
all Web 2.0 THAT's where the bubble is.

All those accredited investors in PRIVATE companies should definitely take
their money out and hand it to a large bank who will definitely not handle it
as poorly as they previously did.

Even if there is a Web 2.0 bubble the size and scope of it is definitely not
comparable to the first bubble, or the subsequent real estate / CDS / MBS
fraud. If you're looking for a bubble look at the NYSE / NASDAQ or basically
any investment a bank could possibly put their fed money into.

Honestly, the problem is that the USV VC model doesn't work well when you can
put a company together for $15,000. That environment much more favors the YC
model, the problem is that once startups reach USV from YC they've already
established traction and generally have a money making funnel that is ready to
be primed with a large amount of cash. Once a company has traction it changes
the valuation formula greatly. The reason that a 3 person startup in 6 months
has higher valuations than in previous years is because the risk / reward
ratio is greatly changed from previous years. Valuations are higher because
the new startup life cycle is much shorter. You no longer need $5 million just
to see if your idea is viable. With the amount of cash that the big boys have
on hand and the difficulty of a modern IPO I think the industry is headed
towards more informal version of Japanese style Keiretsu model where startups
are using resources of larger parent entities rather than the more formal
VC/IPO.

YC has taken the bottom end of the market from USV, so USV sees higher
valuations because YC has already taken the risk and weeded out a bunch of
companies that didn't work out. So from an entreprenuer perspective you'll see
both higher AND lower valuations. Once a startup reaches USV it's higher than
in previous years but you'll find a lower valuation for your seed round
because of YC (and the associated lower costs of startup).

~~~
ojbyrne
I'd quibble with "anyone's pension riding on it." Much of the money that is
invested in Venture Capital is from public employee pension funds like
CALPERS.

~~~
kls
I'm beginning to suspect that there is a good deal of quantitative easing
money slithering into the valley.

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Silhouette
Sounds pretty reasonable to me. On the figures in the article, Facebook has an
effective leading P/E worse than 20. That would be on the high side for a good
investment in an established company in a vertical market, so presumably it is
based on investors' assumptions about future growth and market directions.

Let's consider growth first. We're talking about _Facebook_. They _already_
dominate the social network space, with an amazingly high percentage of the
potential user base in many countries. There isn't a lot of growing to be done
in terms of product base (i.e., number of Facebook users) in those countries.
Likewise, Facebook users already seem to spend a staggering amount of time on
the site. There isn't a lot of growing to be done in terms of getting people
to use the site more and therefore increase the value of ads. Growing into
other geographic markets might help, but they have still failed to establish
dominance in places like China, so that's far from a safe bet.

In terms of market direction, though, it seems like all the most likely routes
are downward. There must be at least three obvious risks of a business-
threatening scale:

1\. Advertisers could find a more efficient mechanism and desert Facebook _en
masse_.

2\. An alternative social network, or simply other ways to entertain yourself
and keep in touch with friends, could cause users to desert Facebook _en
masse_. (Keeping in mind that most of Facebook's power comes from its viral,
highly networked nature, this is a serious risk: you only have to lose enough
users that people can't rely on sending out news/invitations/whatever via
Facebook and assume friends who aren't on it are weird.)

3\. Privacy regulators could clamp down more than they already do as public
awareness of the related issues continues to increase, underming the whole
targeted advertising business model.

I suppose that's all relatively sane compared to Zynga, though, where the
leading P/E isn't quite as bad but their entire business model is effectively
based around the continued dominance of Facebook or a similar platform _and_
their ability to keep people's interest in the long term.

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dryicerx
This reminds me of <http://www.youtube.com/watch?v=I6IQ_FOCE6I>

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citricsquid
I hope I don't lose my job. Maybe it's time to start saving so we can all ride
it out and then save up during the next!

~~~
timr
You're being sarcastic, but there's truth in your comment: the best time to
have free cash is when everyone else is crapping their pants at the bottom of
a market. You get that cash by being _conservative_ when everyone else is
losing their mind at the peak.

Remember: this time, it's different. It's always different.

~~~
lwhi
Hmm.. it's always cyclical in my experience - which is why we have a recession
every 10 years.

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sabat
Crack.

That's what Fred Wilson and Dan Lyons are smoking. It has to be. No one could
seriously be suggesting that we're in a bubble.

