Bubblicious?

Matt Stone and Matt Richtel turn their attention to the millions that Web start-ups are raising or receiving in acquisitions, and wonder if things are just a bit too bubblicious:

[from Silicon Valley Start-Ups Awash in Dollars, Again - New York Times]

Internet companies with funny names, little revenue and few customers are commanding high prices. And investors, having seemingly forgotten the pain of the first dot-com bust, are displaying symptoms of the disorder known as irrational exuberance.

Consider Facebook, the popular but financially unproven social network, which is reportedly being valued by investors at up to $15 billion. That is nearly half the value of Yahoo, a company with 38 times the number of employees and, based on estimates of Facebook’s income, 32 times the revenue.

Google, which recently surged past $600 a share, is now worth more than I.B.M., a company with eight times the revenue.

More broadly, Internet start-ups are drawing investment based on their ability to build an audience, not bring in revenue — the very alchemy that many say led to the inflation and bursting of the dot-com bubble.

The surge in the perceived value of some start-ups has even surprised some entrepreneurs who are benefiting from it.

[…]

The trend is described as a return to madness (by skeptics) or as a rational approach to unlimited opportunities presented by the Internet (by true believers). Greed, fear and a desperate rush to pick the next big winner are all adding fuel to the fire that is Silicon Valley’s resurgence.

Well, well. But these investments are not an IPO frenzy, this is not taking widow-and-orphans’ money from pension funds. This is largely venture money, money from weathly folks. They have to diversify their investments, and they are putting some of it in bets on the Web. With traditional media and traditional software plays in steep decline, what should they do? Sit it out?

And the competition between the Leviathans — Yahoo, Google, Microsoft, and the waning AOL — is a battle for the future, not the past. It’s not about last year’s innovations executed more efficiently. It’s Tomorrowland, and Jaiku, Twitter, and Facebook are enclaves of visionaries, inventing the future. That’s what the Giants are after.

Tim O’Reilly is quoted in the article saying the bets being made are “irrational”, and that “there are going to be a lot of people out of work again” when the bubble pops. Seems like Tim is speaking contrary to the themes of the Web 2.0 conference opening today, which is a co-production of his company. I spoke to him briefly last night at the opening of the new 1 Lombard St offices of O’Reilly Alphatech Ventures, in which O’Reilly Media is a partner, and which has investments in a batch of Web 2.0 start-ups like Tripit, Wesabe, and Satisfaction. I suppose his investments are bets, too, but I wonder if his partners at OATV consider them irrational?

And O’Reilly seems to be contradicting John Battelle, another co-producer of the conference, who wrote this in November 2005 for the New York Times, addressing the same bubblicious remarks two years earlier:

[from Building a Better Boom]

[…]

But regardless of all this déjà vu, we are not in a bubble. Instead we are witnessing the Web’s second coming, and it’s even got a name, “Web 2.0” - although exactly what that moniker stands for is the topic of debate in the technology industry. For most it signifies a new way of starting and running companies - with less capital, more focus on the customer and a far more open business model when it comes to working with others.

My sense is that it is not time to head for the hills, at least not quite yet. Battelle made the case that this boom is structurally different: new start-ups require less capital now to get their companies off the ground, it’s not being fueled by IPOs, and we are building on a more stable platform of technology. Perhaps most importantly, there are more people on the Web everyday, doing more there than ever before.

While there are going to be busts to match the booms, and astronomical prices to buy tiny promising start-ups will continue to poke us in the eye, I think any short of shake out will not be driven by irrationality, but by a shortage of vision in the larger players. They look inside and see less innovation that outside. No surprise, when the entrepreneurs thrive externally and are naturally more risk oriented than those who plug along punching the clock at Consolidated Widgets, Inc.

The Bigs have a lot of chips to bet, and they are all eyeing the chips of their competitors. Sure, they could always sit out a few hands, but if they do, they may be looking at a single competitor with all the chips. So they stay in the game, and keep betting. It’s not irrational, even though they are making big bets. They are playing for all the marbles, and the only other option is to quit.

A steep decline in the stock market, precipitated by the housing bust or people waking up to the costs of the bellicose global politics of Bush’s White House, could send major ripples across the pond, puncturing the current status quo of tech’s buying frenzy. Absolutely. But in the meantime, I bet they will continue to raise the ante.