The knee-jerk reaction to IPO fever sweeping Silicon Valley is that we're in the midst of a new tech bubble. There is, after all, plenty of stupid money flowing all too fast. (Exhibit A: Color, Bill Nguyen's baffling picture-sharing service, which was funded to the tune of $41 million but flopped immediately when users encountered its worthless design.)
But there are some signs that this bubble might not be like the last, and this infographic by Column Five for Focus offers some tantalizing data points. For one, the present bubble, if that's what it is, doesn't seem to be quite so widespread as the one of 2001. Simply put, the 2001 tech bonanza was extraordinarily diffuse — it was the entire Internet that was being bid up. With no established players or business models, the bubble was built on a very vague notion of what the Internet could be. Instead, the current stock-selling rage isn't happening all in public, and it seems to be clearly concentrated in social media:
And as the bottom portion of the infographic above shows, the big company driving most of that activity is Facebook. (It's telling, I think, that Groupon's founders have been far more willing to cash out than Facebook's: The daily deal rage is a far shakier business, with huge new competitors every day. Of course you'd want to get out now.) While those private trades are generating spectacular wealth, Facebook does have a tangible success story behind it — there's no arguing about its user base, wide-reaching influence, or ability to bring in cash. Facebook's very success — and the sheer unlikelihood that anyone could ever hope to emulate it — probably tamps down speculative rage for other, similar services.
And Facebook hasn't even IPO'd yet — which at least tells you that some of the biggest investors are being far more cautious than they might have been 10 years ago. Make no mistake: You can't have a true tech bubble unless you have absurd levels of IPO activity. We don't have anything close to that today:
Unlike 2001, your grandmother isn't pooling all her cash in tech stocks. The mania might seem large, but it's at least stable rather than cresting. Compare: In 2000, investment activity in tech peaked at $27 billion in a single quarter. Today, that number is $9 billion, and the curve has flattened. And the market isn't giving incentives for people to get crazy, either: The bumpy rides suffered by LinkedIn and Pandora haven't exactly made an IPO look like a sure bet for cashing out.
Looking at the final set of charts above, what surprised me most wasn't how insane the company valuations are compared to revenues — that's to be expected with any new company. What surprised me most was that there actually are revenues there to begin with. LinkedIn made $243 million in 2010, Groupon made $760 million (and will likely top $2 billion in 2011). There's no denying that these are real businesses.
There's certainly some wild speculation going on, especially on the part of venture capitalists. Those guys seem pretty happy to throw $41 million into the trash, which certainly indicates that something is broken. But unlike in 2001, that speculation isn't getting cranked up to 11 by day traders and soccer moms. That's actually reassuring. The last thing we need in the stock market now is another wild card.
[Top image by Caroline Gagne]