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Bubble 2.0

Ten years after the dot-com bust, investors are wild for the web again

9 April 2011

12:00 AM

9 April 2011

12:00 AM

There is nothing more maddening to an old-school investor than a bubble. And especially a bubble in which young people are getting outrageously rich. But here we are, 11 years after the last technology bubble popped, in the midst of another of those exuberant moments. Facebook valued at $75 billion. Groupon, a three year old coupon business, at $25 billion. College dropouts with a knack for programming and a devilish knowledge of our online behaviours are suddenly worth more than a roomful of Goldman Sachs partners.

The valuations are crazy, the value investors splutter. There are real businesses with real earnings worth nothing like these shooting stars. It’s immoral! Well, maybe.

The most dangerous thought in any bubble is ‘this time it’s different’. Every bubble, tech or otherwise, reflects the same phenomenon, a wild divergence between price and value. In the early 1980s, Wall Street was infatuated with any company with the suffix ‘-onics’. In the late 1990s, it was companies which promised to rule the new-fangled internet. Which told investors not to worry about revenue or profits, because they were the new paradigm. Give them the money so they could build the brand. Everything else would follow. For a few it worked, for most, not.

So what’s happening now? A month ago, a good friend of mine went to Los Angeles to pitch a company in a start-up contest. In the audience for his pitch happened to be the actors Ashton Kutcher and Demi Moore. They loved the pitch and tweeted about it. Since they both happen to be among the most followed tweeters in the world, word quickly spread. By Tuesday, my friend Bo was fielding term sheets from several investors. It wasn’t just Ashton and Demi any more. It was Silicon Valley’s finest. Some of the earliest employees at Google, now investors of their own vast fortunes, wanted in. One of them called it the most promising idea he had seen since Google.

By Friday, investors had committed $1 million for 12 per cent of this five-day-old company, valuing the entire thing at $8.3 million. As a thoroughly exhausted Bo put it to me after closing out his seed investment round, ‘It’s like I’ve found a tiny dragon and now I have to bring it up.’


The idea? It’s called Zaarly and allows you to offer any amount to anyone for anything. Say you’re standing in line at a restaurant and want a table now. Rather than trying to slip the waitress a twenty, and risking rebuttal, make an offer. The offer pops up on people’s phones and they can decide whether to accept. Or perhaps it’s Saturday morning and you need someone to pick up your dry-cleaning. Make an offer. Someone, somewhere could probably use the money. It promises an economy driven by demand more than supply. It’s also in a magic investment hot zone between social networks, peer-to-peer payment systems and location-based software. Once they have figured out the software and how to minimise the sleaze factor, people offering money for the nastier goods and services which can poison any web service, a beta version should be launched within a few weeks.

Will it work? Could do. The founding team is a winning combination of marketing, programming and operational talent. The idea, once you mull it over for a while, is fascinating. A trial run at a festival in Austin, Texas, went well. And Ashton and Demi remain jazzed.

The Zaarly example proves first of all that you can get a company going these days for much, much less than you could in 1999. You can prototype it and test it with customers for next to nothing. These customers are also willing to help you refine it. You don’t need to build an expensive finished product any more before coming to market.

Consequently, the public markets are not being used to fund this new wave of companies. Private investors are willing to stump up the money for expansion, and a thriving secondary market has grown up in private shares. Anyone can sign up to these online markets and bid for blocks of shares. The early employees and investors at companies like Facebook and Twitter can now trade in their stock long before any public offering. This has relieved pressure on the founders of these firms to endure the hassle of going public. For now, if these companies collapse, a few investors might take a bath. But widows and orphans won’t.

Another big difference is that the firms driving this latest bubble actually have earnings. Facebook and Groupon make money. This was not the case in the late 1990s, when companies went public not just pre-earnings, but pre-revenue. Today’s big names have at least a couple of years of revenue and earnings growth. But more importantly, they have proved their importance in people’s lives.

Twitter’s $10 billion estimated valuation has nothing to do with the $100 million it might make in revenue this year, but more with the fact that it has become an essential communication tool in the lives of millions of people. Whether it’s private investors, public shareholders, marketing companies, Google or an angry Middle Eastern tyrant wanting to shut it down, someone would pay $10 billion to own it. The same with Facebook at $75 billion. With 650 million users all stuffing it with personal data, and marketers and developers rampaging across its platform, it has to be worth a lot. We know that because of what we know about the internet economy. In 1999, it was worth very little as it remained unproven. Today, it’s worth hundreds of billions of dollars.

Naturally, there will be some busts. AOL’s decision to pay $315 million for the Huffington Post is going to take a lot more justification. LinkedIn, the professional networking site, recently filed for its IPO and is likely to be valued around $2 billion. I’m not convinced how irreplaceable it is for its users.

But if you’re a founder of one of these businesses, these are happy days. J.P. Morgan recently closed a $1.2 billion social media fund. Goldman Sachs had to beat off investors wanting in on its stake in Facebook. Rovio, the tiny Finnish company which created the hit iPhone game Angry Birds, just raised $42 million to fund the development of more games, and Angry Birds cartoons and merchandising.

With so much money sloshing around, there are bound to be some truly ruinous investment opportunities. Bankers will be peddling desperate IPOs. Once the slicks in suits crowd out the geeks in hoodies, the next bubble will have truly arrived.


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