A bubble in crash stories: The LA Times today has a curious story that echos similar curious stories recently. It’s a story that, by its construction and headline, implies there is another Internet boom and bust in the making. At the same time, the article makes some rather common sense observations that display how a flurry of VC investments in a narrow-band of “Web 2.0” startups is quite different to the real financial boom and bust of 1998-2002.
The current run-up does differ from the late-1990s bubble that began to implode in 2000, wiping out within two years $5 trillion in paper wealth on Nasdaq, the stock market on which the shares of many tech companies are traded. The market value of Nasdaq companies peaked at $6.7 trillion in March 2000 and bottomed out at $1.6 trillion in October 2002. It has since rebounded to $3.6 trillion. One key difference is that the volume of venture investment is much lower than it was during the first Internet boom’s height. The amount invested in the first quarter of this year was just one-fifth the $28.1 billion spent in the first quarter of 2000, according to PricewaterhouseCoopers’ MoneyTree report, which tracks venture investment. Also significant is the lack of investor appetite for initial public offerings. Unlike the last round of online exuberance, small investors aren’t likely to buy shares in an online pet store with a sock-puppet spokesman.
As I’ve said here many, many times. There will be a huge amount of VC money wiped out in the over-exuberant investments now taking place. However, VCs are professional investors. They know (or claim to) the risks inherent in making early bets on companies that have no revenues to speak of. If they lose everything they invest, it still can’t be classified as a “bust” if the losses are limited to the founders and the professional startup investors. Let’s get this straight once more: VCs are not widows and ophans who are taking money out of mattresses to invest in an IPO of Pets.com.
Oh, speaking of Pets.com, the LA Times story includes this quote:
Some venture capital investors, once burned, are twice as skeptical this time around. For example, Hummer Winblad Venture Partners, which backed one of the poster children for the dot-com implosion, Pets.com, is studiously avoiding next-generation Web companies.
So answer this: How is a company that creates something called a Widgetizer Engine not a next-generation Web company? And please don’t use the Web 1.0 terms “infrastructure” and “tools” in the answer.