I was on a panel last night at an even organised by Jon Watts of MTM London. The event was billed as a discussion about building internet businesses in the UK, but much of the debate turned to whether we are in a bubble at the moment, a topic that keeps coming up at the moment.
When there is talk of bubbles the comparison point is always with the 1999-2000 internet bubble, a period in which a) valuations sky-rocketed and b) many highly valued businesses lacked the substance to become real businesses.
The parallels between now and the late 1990s are:
- that some businesses are commanding huge valuations – Twitter $8-10bn, Facebook $60-70bn, Groupon $12bn etc.
- some much earlier stage companies are also receiving investments at valuations getting towards $100m for companies with a small number of months of good user growth but little else
- there is a widespread feeling that new levels of web penetration are going to change the way we live and do business – last time round with the wired web, this time round with mobile
The differences are that the fundamentals are much stronger this timer round – revenues are higher, costs are lower and more real value is being delivered to users – and that the high valuations are largely limited to private companies in the Valley.
For me the defining characteristic of a bubble is when a painful crash is likely, and I don’t think we are in that situation now. Not yet anyway. As Fred Wilson and others have argued, prices for some assets are definitely on the high side right now, but if there is a correction (which I think would be healthy) then the pain would largely be limited to VCs and other professional investors and I think it unlikely that the ramifications would be widespread. Given that most of these businesses have real substance I doubt many of them would go under.
The next few months will be interesting to watch. The combination of cuts in government spending and the impact of the middle east crisis on oil could undermine confidence in the general health of the economy both here and in the US which might lead to the correction mentioned above. Alternatively the world economy might ride out these shocks, in which case the valuations of private companies might continue to rise and we may well find ourselves in bubble territory.
For a more pro-bubble read check out Alan Patricks How the Bubble moves to main Street.