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Another Dotcom Bubble? December 12, 2010

Posted by Peter Varhol in Software platforms, Strategy.
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So ponders Daniel Lyons in this Newsweek article, pointing to high valuations for tech startups that have little or no revenue.  He notes that some well-known companies with just a few employees are receiving VC funds that value them in the tens of millions of dollars.

The New York Times concurs, in this article published a day later.

In some respects it certainly doesn’t feel like another dotcom bubble.  A decade ago, unemployment was hovering around four percent, and anyone who wanted a job in the new economy could pretty much get it, no matter what their qualifications.  The NASDAQ was peaking at over five grand, and fortunes were being made.

But perhaps the bubble was more hype than reality to begin with.  While I was gainfully employed in software and making a decent income in the late 1990s and early 2000s, I wasn’t making an outsize salary, and I wasn’t (regrettably) at a company with high growth prospects.  But I did okay, and wasn’t thrown out of work at the bust, but other than 401K losses, the bust didn’t affect me all that much.

As is often the case, there are doubters.  In Lyons’ article, he notes that VC luminary John Doerr thinks that valuations are appropriate, primarily because the winners in social networking technology will see outsized results once the business model becomes clear.

There are a couple of worrisome signs.  Relatively mature companies such as Facebook and Twitter don’t have business models that bring them to profitability.  They may be looking for acquisition rather than an IPO, which means that any bubble isn’t affecting the stock market, but that doesn’t mean that they are worth what VCs and investment banks are valuing them at.

Despite the fact that the everyday economy doesn’t seem very strong, there’s a lot of investment money chasing some not-very-good opportunities right now, so it’s costing a lot to get into the game.  Does this mean that the money is worth the investment?  Probably not.

At the very least, look for popular social media companies to be bought for huge amounts by more established (and profitable) tech companies (Google and Microsoft, anyone?).  I’m seeing this turn out like Oracle’s acquisition of Sun and Java.  There’s the need to have the acquisition make money, so the acquirer is going to find a way to charge for previously free services.  And no one will be happy.

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