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The Bubble 2.0 Meme Won't Die
Dvorak's the latest to talk about bubble 2.0. I've been talking about this for several years now as I see many similarities to what we went through in 1999 and 2000. But I also see many differences. I'm on the fence and am simply trying to be measured and smarter about what we do this time around.
That said, I'll say two more things:
1 - The more naysayers, the better. The market climbs a wall of worry and we rarely top out when there is a lot of negativity.
2 - Bubbles aren't all bad. As Tom Evslin says, "nothing great has ever been accomplished without irrational exuberance".
August 2, 2007 in Venture Capital and Technology | Permalink
Comments
I think the lack of public investing in Web2.0 defeats all claims of a true bubble.
http://csertoglu.typepad.com/sortipreneur/2007/08/john-dvorak-cal.html
Posted by: Cem Sertoglu | Aug 2, 2007 4:46:39 AM
Dvorak's article certainly would have been interesting had he given even a single point of reasoning as to WHY this is a bubble or WHY it is about to burst.
This honestly looks like the writing of a 7th grade C-student.
"The market is going up and people are really getting involved in it and this happened with another technology and that other technology and look where they are now. Plus here are the things that make this popular and notice that they are all popular I don't know if one of them will make the bubble burst but I know it will."
According to the logic of this article, the whole "horseless transportation" fad is a bubble waiting to burst too.
Posted by: Andy | Aug 2, 2007 8:26:30 AM
Agree about the value of "irrational exuberance". As it says somewhere in "Crossing the Chasm" you can't get from one side of a big chasm to the other in a series of small, safe jumps.
Posted by: Jonathan Peterson | Aug 2, 2007 10:08:36 AM
The current situation differs in at least two major ways from the "dotcom" bubble (which was really the "telcom + dotcom bubble"):
1) The public market, even for tech stocks, is highly priced (ratios-wise) but is not ridiculously priced. GOOG's PE ratio is 43. AAPL is 38. AKAM is 78. These are indeed high -- the S&P 500 is in the high teens -- but nowhere near the mania-heights of 1999-2000. And, as I said the S&P500 is still in the high teens, historically a bit high, but a reversion to its historical mean (12-15) or even a little below would not be a catastrophe.
And corporate earnings are still OK.
And the deals getting done may seem big but on average are actually pretty sober and rational. Why CBS paid up for Last.fm (a service I love but which had no discernible business model as yet) I do not understand. But why Disney paid up for Club Penguin (another service I love) is entirely apparant and rational -- the business is real and the ratios make sense.
And, sure Google pays a "Google-premium" for acquisitions, but that's because they are in pre-emption mode, preferring to wildly overpay rather than see an asset wind up elsewhere. But note -- the public markets are starting to punish Google for such expensive habits (and for all its other wildly extravangant habits).
2) More importantly, the average consumer (e.g. retail investor in stocks or mutual funds) is not heavily invested in tech or Internet plays. In 1998-1999-2000 even the small retail investor was piling into tech stocks and funds.
Plus, many many thousands of people who worked in tech companies stupidly left their pensions and 401k's lopsidedly invested in their own companies' stocks which seemed to be made of helium.
So when the "bubble burst" the deflating pain was felt by a broad spectrum of people -- including, most painfully, people who could not afford to have exposed themselves to such risky investing strategies and needed the money to live or plan for retirement.
Today, IMHO, the situation isn't so much of a broad-reaching "bubble", as a humungous oversupply of venture capital, a situation that will someday "burst" but will only effect the pensions and endowments and high-net-worth investors who buy that asset class. Too much money is chasing too little return -- that is painfully obvious to anyone who invests in venture capital.
Most notably, the management fees are way too high -- most venture firms only invest 80-90 cents of every dollar they raise from LPs! -- so to beat the S&P500 Index return in a corresponding time period, VC funds have to achieve a 3X cash-on-cash return.
But for the last 8 years, and for the foreseeable future, the top quatrile VC funds will maybe return 1.5X-2X. (Which is maybe why management fees are so high -- so few VC partners are taking home any carried interest.) And thats the top 25% of funds. Sure the out-layers will generate monstrous mouth-watering returns. But the typical venture fund will not only fail to beat the S&P500 Index, it will fail to beat money-market and CD returns.
But the good news is, this will only affect pension funds and endowments and the like -- whose overall allocation/exposure to this asset class, despite the huge sums involved, is still relatively small (maybe 2-8%).
Trouble, but no bubble.
Posted by: Steve Kane | Aug 2, 2007 11:25:07 AM
That was the most pointless opinion piece I've ever read. Thanks for bringing it to my attention Fred. Now I'm convinced once and for all that I don't have to bother reading any more Dvorak (or anything Ziff-Davis for that matter).
Posted by: DeVer | Aug 3, 2007 9:56:17 AM
