Doing and keepig business in the post-dotcom dystopia

hiake · Oct 18, 2007

The Fear Bubble

Brad Stone and Matt Richtel wrote Wednesday on the front page of The Times about the surging values of Internet companies, a trend that evokes the madness of the late 1990s. The values might be mad, but this is a very different world now.

This is a bubble inflated by fear. The last one exploded from greed.

In 1995, people woke up, saw the Netscape browser, said, “This is going to change everything,” and started the world’s biggest land grab. They raised billions of dollars for grand schemes to reinvent entire industries — Webvan, VerticalNet, Homestore, and so on. Meanwhile, hoping to cash in on the revolution, investors bid up the prices of the flimsiest shells of companies to astronomical levels.

The greed bubble collapsed like a Ponzi scheme. It turned out that these companies had spent all the money they raised on Super Bowl ads, robotic warehouses, and gleaming offices to hold hundreds of people. Yet there just wasn’t enough money to pay the bills, especially since the biggest source of revenue for many Internet companies was advertising from dot-coms that had just raised a round of venture capital or gone public. Most of these companies were so overextended they couldn’t adjust to the new reality: The Internet may change everything, but it takes a while.

The fear bubble has a completely different dynamic. The main drama revolves around the slowing growth of the winners of the last round — Yahoo, eBay, AOL, Microsoft. They are mainly worried about how Google is sucking up all the consumer attention and advertising money. They also worry that some little start-up will turn into the next Google.

So out of fear, these companies are trying to regain their youthful growth through acquisitions — lots of little companies like Flickr and some big ones like Skype and Avenue A.

Google is less afraid. But it is run by people who have spent their careers fighting Microsoft (mainly at Sun Microsystems and Netscape), and so it too buys up companies, both for growth and to keep them out of the hands of rivals. (I’d say this was a good part of Google’s motivation to buy DoubleClick.)

These fear-driven deals are setting the prices for companies that flow to other acquisitions, venture fundings and the public market. (The British economist, Carlota Perez, wrote to Brad Stone about this and other economic factors of this bubble.)

There are a handful of public offerings, but there is none of the frenzied rush by individual investors to day trade every company with a Web site and a story about a revolution.

Sure, Google’s stock price is soaring and the company is worth nearly $200 billion. It’s easy to say that is overvalued. But there is also no question that Google should be worth a lot. It is incredibly profitable, growing rapidly, increasing its market share, and minting cash. The company’s shares may fall; they may even crash if there is bad news. But it is not going to vaporize into in a cloud of worn-out hype and broken dreams like so many dot-coms.

The start-up companies have been shaped by fear, too, although mixed into a healthy dose of greed. Entrepreneurs have learned to be wary of losing control. So they have avoided taking too much venture capital and shy away from business that require large capital investments. The archetypical Web 2.0 start-up has been built on some nifty Web feature that hopes to capture some attention. Pretty much all of these businesses can be run entirely by people in their pajamas … in Estonia. There are no Web 2.0 warehouses. And there are no Super Bowl ads either.

For venture capitalists, this makes for a challenging environment because the start-ups need them less. Still, there is money to be made, hoping for the next YouTube and settling for the next Del.icio.us.

Still, as time moves on, caution has receded, and panic over Google has increased. So the Internet giants keep bidding up smaller companies, and the venture capitalists in turn get more liberal in their terms in hopes of flipping companies to the big boys.

There’s no doubt that eBay’s $1.4 billion writedown of its investment in Skype won’t be the last time that a big Internet company will be forced to admit that its fear made for a foolish checkbook. And if a few more companies swear off such deals, some VCs may be left holding some Twitters that didn’t lay golden eggs.

But what you don’t see is hundreds of companies, backed by billions of dollars, that they have spent so much more money than their business prospects would justify that they are just waiting to crash like Wile E. Coyote when he looks down to see that he has run off the cliff.

Unless that changes, the ending of the fear bubble will be very different from the end of the greed bubble.

Source: NYTimes
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It's like investing in random children and hope they will become the next Einstein... Or was that colonization of the tech business?

Doing and keepig business in the post-dotcom dystopia

hiake Vardøgr of da E.Twin