There’s been talk for a while now that the hightened investments in social networking technologies ala Mint, Zynga, Slide, Groupon, etc. are fuelling a tech bubble similar to the 90’s. Alexander Hotz of Mashable.com gives four reasons why this isnt true.
Should Twitter, a company with a relatively untested revenue model, really be valued at $10 billion? Should Facebook — even with its more than 600 million users — have a larger market valuation than a major automaker like Ford? Some rumors have even hinted at Quora, a startup that was only made available to the public in June 2010, being valued at $1 billion.
Well-respected industry insiders have also voiced their concerns. “When I look at where we are right now, it reminds me so much of 1999, and frankly it scares me,” said Union Square Ventures VC Fred Wilson. Former IAC CEO Barry Diller went even further, referring to the recent valuations as “mathematically insane.”
But not everyone shares their fears. Three New York entrepreneurs who lived (and built successful companies) during the heady days the first dot-com era think that the comparisons being made to the ’90s bubble are themselves inflated.
According to Jeff Stewart, Steve Krein and Andrew Weinreich, the jury is out on whether there is a bubble. What is clear is that whatever is happening today is fundamentally different from what happened in the 1990s. Here’s why.
1. Startup Costs
“[In the 1990s], when you started a company, more money was pumped into office space, servers and equipment,” said Mimeo.com Founder Jeff Stewart. “Today, when you build a company, you don’t own a server — you might even have mobile office.” With so much infrastructure now in the cloud, entrepreneurs can focus more on the product than they could in the past. For their part, investors don’t need to invest as much, so at least in comparison to the 1990s, oftentimes the risk is less. Bottom line — it costs less to start a company today.
2. Public vs. Private
In the 1990s, tech companies raced to secure a lucrative IPO. When the bubble burst in March 2000, those who got burned weren’t just angel investors and VCs, they were less experienced investors who had jumped on the tech bandwagon.
Today, younger companies aren’t in a rush to go public. Think Facebook’s “special purpose vehicle” with Goldman Sachs. What’s more, today’s public tech companies are market stalwarts. “You can’t call Amazon or Google or Apple overvalued,” said OrganizedWisdom CEO Steve Krein. “[In the 1990s] you could have called DoubleClick, Amazon and Yahoo overvalued.”
Krein agrees with Fred Wilson that the startup world has some “frothiness” or excess capital, but comparisons to the 1990s don’t take into account where the investors are coming from.
A less tangible difference between the 1990s and today’s startups is the dynamic between the up-and-comers and the established titans. “[In the 1990s] there was a sense of confidence that the new companies would knock off the old companies,” said MeetMoi.com CEO Andrew Weinreich. “Imagine Time Warner, the most venerable of media companies, literally giving away half of itself to an Internet startup AOL. If you were in a startup, you really thought that you would knock off existing players.” Today, the big players are the survivors of the dot com era.
4. The Bubble Isn’t a Profitable Joke
In 2000, entrepreneur Philip Kaplan created the satirical website FuckedCompany.com (a take on Fast Company), lampooning the absurdities of the startup world. “When you have a profitable business built around making fun of the bubble, that’s an indicator,” said Stewart. The site made some serious money off the woes of the floundering dot com world. Today, while satirical blogs and social accounts are plentiful, none of them come close to the profitability of lampooning the last bubble.