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There has been increasing commentary lately about a "current startup bubble." Aside from Qwiki, people have pointed to the valuation of Facebook, Zynga, Groupon, and others. An important question is, do recent valuations indicate a second industry-wide Internet bubble, much like the bubble and subsequent crash in 2000? Or is something else more fundamental going on?

A look at the progression of other infrastructural technologies is useful. Consider the history of electricity. Paul David, an economic historian at Stanford, noted that it took many decades for business and society to reap tangible benefits from electricity. While important technologies were introduced throughout the 1800s (e.g., electric motors, light bulbs, generation stations), David suggests that an observer in 1900 would have found scant evidence that electricity was having an impact on business efficiency. To take advantage of electricity required not only the introduction of new technologies, but also a deepening of our understanding and in turn a transformation of business and social processes. For instance, manufacturing facilities, which were originally designed for steam power, needed to be significantly reconfigured.

Although David’s discussion was focused on the lag in productivity improvements resulting from electricity, it provides some useful insights about the state of the Internet and its commercialization. While the first computers emerged in the 1940s, and the Internet was born in the 1960s, it wasn’t until much later that computing and the Internet were widely adopted by business and consumers. For instance, it wasn’t until the early 1990s that the Internet transitioned from a government/ academic project to a commercially available system, and the Internet wasn’t broadly available to consumers until the mid-1990s.

In a mere five years from the commercial emergence of the Internet, we faced the first Internet bubble and bust in 2000. Looking back at history, it’s no surprise that the first wave of applications generally performed disappointingly, both technically and commercially. Broadband connectivity, the Internet backbone, and critical software and hardware standards were still in the early stages of development. Along with an emerging infrastructure, there was a limited understanding of the potential of the Internet among entrepreneurs, established companies, and broader society.

Now that we’ve had 10 more years to develop core infrastructure and to deepen our understanding of the Internet (and computing) from a technical and commercial standpoint, we are witnessing the emergence of a new crop of high-growth companies. Distinct from many of the Internet companies that arose in the late 1990s, a greater percentage of today’s companies receiving venture funding are both technically and commercially viable. Many deliver real customer value and have a tenable revenue model. In addition, to companies such as Facebook, Groupon, and Zynga, there are a myriad of smaller successful ventures, such as Pandora, Dropbox, and Airbnb.

To conclude, the 2000 bubble arose just a few years after the commercialization of the Internet. There was excitement about the potential of the Internet, but the supporting infrastructure and our knowledge was in its relative infancy. A decade later, we have made significant progress on both fronts. The latest new ventures incorporate technologies and business models that reflect significant infrastructure improvements and our maturing knowledge-base. Are select companies overvalued? It’s possible. Does this overvaluation reflect an industry-wide bubble? I don’t think so. In fact, I think we are at the early stages of a multi-decade transformation, catalyzed by computing and the Internet, and we will continue to see significant opportunity and new venture growth in this space. We are moving toward ubiquitous computing and connectivity, where technology pervades our business and personal lives. Personally, I look forward to participating in this exciting and dynamic future!

Your post, while insightful, doesn't really provide much reason as to why there seems to be a huge influx currently of high funding rounds for seemingly basic or non-profitible companies, the likes that I have not seen since the 90s. The companies you mentioned, Pandora, Dropbox, and Facebook are probably the exceptions, and don't release financials to my knowledge. It will be interesting to see what Facebook actually makes when they publish numbers next year. Last I heard Groupon started with huge profitability and now is burning way more money then it makes (I also doubt it to be a sustainable biz model).

There is definitely a bubble right now, I've seen average 8-15mil rounds for companies that offer something tangental to a popular service (it's LIKE FourSquare, or it's LIKE Pandora) despite the fact that original services themselves are not necessarily making huge exits. Perhaps it's just that the horizons on the dotcom VC funds are expiring and there are lots of new funds?

I think the answer is a bit more simple than that. Where else should people put their money if not in high tech?

Industrials correlate to GDP, and GDP is projected to be flat. Same goes with consumer products and volatility is too high in media. If you have capital to put to work, Tech appears to have the highest risk/return profile.

Phrased differently: if you had $10mil, where would you put it?

are internet companies still considered high-tech? http://en.wikipedia.org/wiki/High_tech

Phrased differently: if you had $10mil, where would you put it?

25% stocks, 25% bonds, 25% gold, 25% cash?

(That's literally what the "Fail-Safe Investing" book boils down to. http://en.wikipedia.org/wiki/Fail-Safe_Investing)

fail-safe meaning you're ready to lose up to 50% of your investments? cause quite a few things on that list are mutually exclusive...

The author argues that these four types of investments are very unlikely to go down at the same time - if one loses a lot, the other types grow.

    "	It might seem that a Permanent Portfolio
    containing these four contradictory investments would
    be neutralized: As one element rose, another would fall
    and nothing would be gained.
        	On a day-to-day basis, that can be true.
    But over broad periods of time, the winning investments
    add more value to the portfolio than the losing 
    investments take away."
He gives some numbers in the book, from 1970 till 2002 the portfolio lost money only in four years: 6.2% in 1981, 0.7% in 1990, 2.4% in 1994, and 1.0% in 2001. Three of these four years were followed by double-digit gains. The average gain was 9.5% per year.

70-02 period is pretty irrelevant in today's world though. how did such portfolio perform during Great Depression, which is more like what we face today?

Would it have been possible to raise $8m in VC funding for a glorified slideshow during the Great Depression?

I think the author wrote from personal experience, so he could be either too young or not even born yet during Greate Depression.

unfortunately investment advice written from personal experience is pretty useless if not harmful.

"GDP is projected to be flat."

This is utterly absurd and shows a complete misunderstanding of economic growth.

On the contrary, it makes sense. There were a huge influx of liquidities from the central banks around the world, and this money needs to be invested into something. Western GDP is pretty flat now and has been for a while if you don't take into account the various credit bubbles, and will probably stay so for the foreseeable future - as long as oil prices stay over 75$ a barrel at least, which may very well be forever.

Should companies only be highly funded if they are similar to popular companies already making huge exits? Wouldn't this sort of be "missing the train"?

This comment should be upvoted a ton more.

If you're pitching your business as X for Y and X is still a massively unproven startup - you've missed the train.

Work on creating your own X - you want to be the market leader - its the only way to truly win in the consumer web.

Good points. It's hard to say what specific factors are driving the substantial influx in capital. However, I agree with the comment about investment alternatives. Where else can you invest today and expect a significant return? On this point, there might be a bit of resulting froth in the angel and venture capital markets, but I don't think this reflects an industry-wide bubble as what we witnessed in 2000.

Take Facebook as an example. Is Facebook worth $50b, per the recent Goldman Sachs investment? It's possibly worth much more, if we assume that Facebook is the winner-take-all in a network market (social networking). Are there significant uncertainties related to Facebook's revenue model and the company's ability to fend off substitution threats? Yes. But this is consistent with the risk/reward profile that comes with an equity investment in a privately held, high-growth tech company.

Wonderful comment. One of the reasons there has been a huge influx of funding is that there was A LOT of sideline cash in 2008. A lot of the fear has since evaporated, and funding and liquidity has increased, albeit, with some pent up back pressure.

As always, incredibly insightful remarks. The bit about developing core infrastructure rings especially true. The emergence and success of these web businesses has a lot to do with the absurdly low barriers to entry for creating software for the web. This is largely thanks to the development and proliferation of open source tools.

It's not surprising that so many successes should shake out the other end of the sieve when it's so easy for someone to launch a successful site from their bedroom or dorm.

Thanks Danilo! I appreciate the kind words.

Some constructive critism: you make some good points, but it's hard to digest them in such a long format. I'd suggest you try editing your thoughts down more aggressively so that readers can digest them quickly. If you find yourself having to write a conclusion paragraph to a comment, odds are you're not editing your key points down enough to get them across.

This isn't meant to be offensive, it's just one of those things that until someone tells you about it you'll continue to go on unknowingly making the same mistake. I had someone do this with me recently in regards to my presentation 'skills', or lack thereof, and it was very helpful.

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