A New Tech Bubble?

by Louis Marascio on May 25, 2011

The year was 1995. I was working at FlexNet, a local ISP in The Woodlands (a northern suburb of Houston), as a tech support jockey and hack programmer. It was a small company, maybe 10 employees, and was owned by two old business partners who didn’t know much about the Internet but had other successful ventures in insurance and real estate. This was a great time to be involved with the Internet–it was still raw and rough around the edges but compared to today it was “pure”. The Internet still felt like an exclusive destination; something you could do that other people couldn’t. I still fondly remember the looks I used to get when I told other people, disconnected people, about the Internet–one part pity and two parts disgust.

This particular day was special. I was under our marketing guy’s desk installing a new video card in his new computer. He was ferociously pacing about, demanding that I hurry the hell up. As far as I was concerned this new video card had only one purpose: after hours Duke Nuke and Quake, something me and the 3 other “tech guys” at the ISP would do every weekend. However, Mike the Marketing Guy could care less. He wanted that video card installed and installed fast. Netscape was IPOing and he wanted to get online.

I didn’t grasp what was happening, but August 9, 1995 was the beginning of the great Internet/Tech bubble. Netscape really was the catalyst. It set the whole thing off. Netscape IPO’d at around $28/share and soared, ending the day up 100% at around $58/share giving it a market cap of nearly $3 billion. Netscape probably deserved most of this valuation; however, this isn’t about what Netscape deserved. This is about the greed that ensued.

You see, venture capitalists and entrepreneurs saw that any story connected to the Internet was a catalyst for very large valuations. A rush was on to IPO. Get in while the getting is good. People are paying, so we’re selling. This was the predominant viewpoint. Once the handful of deserving Internet companies had gone public the search was on for the next big thing. Before you knew it, companies were coming out with little to no revenue and demanding $1 billion valuations. The capital got more greedy than normal and the entrepreneurs were happy to oblige. Easy money.

Unfortunately, as we all know, it ended badly. We all learned our lesson, right?

LinkedIn IPO’d on Thursday May 19, 2011. It soared. Just like Netscape it probably deserved to soar. It’s been a stalwart in the social networking space and has a very large niche (professional social networks) all to its own. But again, just like Netscape, this isn’t about whether LinkedIn deserves $9 billion valuation it currently has. This is about what happens next.

Now that the primary markets are proven open for business to a new breed of dotcoms will we see a gradual but persistent decrease in common sense around the types of businesses that get funded and the types of exits they receive? We’re already hearing news that Zynga is pushing to IPO sooner rather than later–and again, Zynga is a very successful business and deserves to be public if they want to be. What you should be watching for is this: once the 6-12 deserving companies go public will we start to see less deserving businesses sell shares to the public? If so, you have a decision to make. Ride the wave or sit it out.

In my opinion, the next bubble is coming. These things don’t happen all at once nor do they end instantaneously. I’d reckon that if you interviewed any venture guy that lived through the bubble they would claim that they couldn’t get caught up in it again. However, everyone has penis envy. Everyone wants to see their portfolio have tremendous success and going public, especially in a frothy market, is a sure way to make that happen. Once the venture industry sees its possible I have a feeling they’ll begin to push companies to come out sooner than they should and entrepreneurs will be happy to oblige. Eventually we’ll see an erosion in quality of new issues and if valuations don’t adjust, then I’ll personally be staying very far away. Riding the wave can be great fun, but there’s rocks on this beach. Big, jagged, sharp net-worth-eating rocks.

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