Various people have voiced their opinion on whether we are into a
another tech bubble like that of 2001, especially with the recent announcement
of the Microsoft/Skype deal, the LinkedIn float and the big valuations of other
social media companies Twitter, Facebook, Groupon.
The British Venture Capital Association (BVCA) said that conditions are
different. Speaking just before the Astia Investor’s forum in May 2011, Tim Hames, head of public affairs, communications and campaigns at the BVCA, said, “In recent months, and
heightened in the light of the Microsoft-Skype deal announced yesterday, a
claim has emerged that the dot com boom of a decade or so past and the
consequential bust are in the process of being repeated. This seems to me to
fly in the face of the evidence. The dot com boom was characterized by a glut,
indeed a veritable splurge, of IPOs of internet companies. Many of these
businesses were little more than a domain name, a website and a concept.”
“The false premise was that there would be a huge premium for whatever
companies could pitch their tent in a particular section of the market ahead of
any other possible rivals. Furthermore, this was a craze in which hundreds and
hundreds of companies attracted cash from thousands and thousands of
investors.” The full press statement is here.
An article entitled “The new tech bubble” in The Economist says those that claim
it’s not the same as the 2001 tech bubble are right: it says, “This time it is
indeed different, though not because the boom-and-bust cycle has miraculously
disappeared. It is different because the tech bubble-in-the-making is forming
largely out of sight in private markets and has a global dimension that its
predecessor lacked.”
The Economist adds:
“The bubble is being pumped partly by wealthy ‘angel’ investors, some of
whom made their fortunes in the late-1990s IPO boom. Their financial firepower
has increased and they are battling one another for stakes in web start-ups. In
some cases angels are skimping on due diligence to win deals. When it comes to
investing in more established companies like Facebook and the bigger web firms,
traditional venture capitalists now face competition from private-equity
companies and bank-led funds hunting for profits in a bleak investment
environment. Gucci-shod leveraged-buy-out kings may appear to be more
sophisticated than the waitresses buying dotcom shares a decade ago—but many of
the newcomers are no more knowledgeable about technology.”
The Economist concludes that with luck the latest web bubble will do less
damage than its predecessor.
The BVCA also relates its argument to the number of IPOs. In 1999 there were
308 technology IPOs in the United States. In 2010 there were 20. The companies
attracting attention today are well-established ones which have proved that
their technology is robust, that they have a large customer base and can
accumulate substantial revenues. Furthermore, the current deal pattern involves
a relatively small set of businesses being acquired by an even small set of
large businesses. This is a very different story.
Chris O’Brien at San Jose Mercury News also supports this broadly with his
article “Time for reality check on the return of IPOs”, claiming that
while Silicon Valley is getting all excited about the number of IPOs to date
this year being up (Renaissance Capital says there have been 21 so far this
year while the NVCA says there were 14 in the first three months of this year),
they should not consider the IPO drought being over – far from it, he says.
O’Brien says that according to Renaissance, tech IPOs this year have produced an 11.4 percent return, which is just so-so. One of the highest-profile tech IPOs, Demand
Media, is down 28 percent since its January IPO. NeoPhotonics of San Jose is
down 45 percent since its February IPO. A number of these companies have come
out the box and done OK for a week, but then tapered off, says one source in
the article.
He adds that there are the larger structural issues facing any company considering an IPO – “it’s going to remain incredibly difficult for smaller and mid-sized companies to go public. Investment banks are focused on the very largest deals, such as Facebook and
Zynga, and don’t have the staff to handle smaller potential IPOs.”
The conclusion from these and other reports is that we are indeed in a
different scenario altogether. While there may be some high-profile big deals,
it doesn’t seem that we’ve yet reached the dizzy heights of the dot-com boom.
