If you’re an early stage venture capitalist or angel investor there is no time like the present to declare a bubble, say valuations are out of control and predict the demise of the tech industry in the very near future. Since they’re in the business of buying low and selling high, any angle that suggests that the buy price should be even lower sounds great to them.
If there’s any evidence of said bubble all the press will eat it up.
This time it’s the press wringing their hands over the Instagram acquisition by Facebook. Nick Bilton at the NY Times even gets a Stanford business school professor to weigh in:
Professor Pfeffer said that through “the hideous recession” that America has suffered in the last several years, the Valley has applied increasingly incoherent valuations to companies.
“This is 1999 all over again, but this time, it’s gotten worse,” he said, referring to the last technology bubble to burst. “We’re back to companies throwing around funny money. The economic values don’t add up.”
He added: “These companies are simply being founded to be bought. With the exception of a select few, Silicon Valley has spawned no real companies over the past decade. Even now, as the value of eyeballs has gone down, people are buying concepts, not companies.”
I totally agree that whatever is happening right now is exactly like the late 90s, except not really at all. In my post a year ago and in my post next year, I’m sure, I wrote about how different things are. It’s all about public company valuations. P/E ratios in the 90’s were out of control. Today they’re extremely reasonable. From Chris Dixon:
Public tech companies: Anyone with a basic understanding of finance would have trouble arguing many large public tech companies are trading at “bubble valuations” – e.g. Apple (14 P/E), Google (18 P/E), eBay (16 P/E), Yahoo (17 P/E). You could certainly debate other public tech stock valuations (there are a number of companies that recently IPOd that many reasonable people think are overvalued), but on a market-cap weighted average the tech sector is trading at a very reasonable 17 P/E.
In 2000 the world was driven by greed. No one bought into the valuations but they didn’t want to be the only guy on their block who didn’t make millions in the stock market. Today valuations are driven largely by profits.
Facebook’s acquisition of Instagram was driven by fear, not greed. It’s no different than when Yahoo tried to buy Facebook for a billion dollars seven years ago.
It’s about taking a competitor out at the knees before they have time to actually be a competitor.
That’s not a bubble. It’s just smart.
So when Bilton says directly “When this next bubble pops — and it will pop” and gets a source to say “This is 1999 all over again, but this time, it’s gotten worse,” I just shake my head.
Tune in again in April 2013 for the next installment of the blubble.