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March 12, 2006

The Bubble Begins

Sports Illustrated has a well-known reputation for its “cover story jinx”.  History shows that those that appear on the cover of the magazine are doomed to lose the upcoming big game or suffer a terrible injury.  Red Sox fans famously remember that only days after Nomar Garciaparra cover appeared on the March 5, 2001 issue, it was announced that he had a split tendon in his right wrist and a sure-fire Hall of Fame career was derailed.

I wonder if this Sunday’s NY Times cover story in the business section heralds the same “jinx” for the world of Web 2.0.  “Alive and Well in Silicon Alley” raves about the twenty-something founders of the slews of NYC media .coms that are back in vogue – developing cool new media content sites and luring advertisers and consumers.  The article reports that 14 new start-ups are now housed at the NY Software Industry Association’s headquarters.  I would hazard a guess that all of them are pursuing the attention of consumers and advertisers as opposed to enterprise IT companies.

Silicon Valley appears to be smoking the same exhaust that Silicon Alley is smoking.  One of the top-tier Silicon Valley funds emailed us and the CEO of a new media start-up in our portfolio a recent overture:  “we will invest any amount at any price to get into this deal”.  Nice for our portfolio, but scary for our industry.

Another harbinger of doom:  I was speaking to a CEO friend of mine who is searching for her next gig.  She asked me what areas I was looking at.  I listed a range of things, but when I touched on new media/consumer infrastructure/e-commerce she exclaimed dismissively, “Oh all my VC friends are saying that – everyone I talk to is becoming a consumer investor!”.  Uh oh.

Put it all together, my friends, and I humbly submit that we have now hit the consumer bubble I feared a year ago (see May 2005 post:  “Is a Consumer VC Bubble Coming?”.)

And if this observation is accurate, what should VCs and entrepreneurs do about it?  On the one hand, avoiding bubbles like the plague is an obvious investment strategy.

On the other hand, a lot of money gets made in bubbles, particularly if you get in them early.  My former company, Open Market, had its IPO in May 1996 in what was clearly a bubble-like event, with a $1.2 billion market capitalization despite $1.8 million in most recent annual revenue.  That said, a retrospective look at the IPO run-ups after Open Market in 1996 suggest an investor that stopped investing at the first sign of the bubble would have missed on enormous wealth-creating companies.

I guess the smart money isn't afraid to investment in bubbles, but simply knows when to get out of them before they deflate.  We'll see over the next few years where the smart money is.

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In past twenty-four hours, I’ve read both: • A New York Times article, Hungry Media Companies Find a Meager Menu of Web Sites to Buy. The theme portrayed is that despite all of the recent acquisitions in the consumer internet space, “media companies ar... [Read More]

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One thing that's different, web 2.0 companies aren't hinting at the possibility of trying to go public - most seem like buyout plays. Similar to the beginning of the first bubble.. yes, but if this changes will Wall Street play along? I'd say it's doubtful. At this point, the only money at risk is that of the VC's investors.

Buyout plays are a fool's game. You have no control of your own destiny.

You want to control your own destiny? You want to choose a buyout date and price on your own terms? Get to cash flow neutral.

I guess the smart money isn't afraid to investment in bubbles, but simply knows when to get out of them before they deflate. We'll see over the next few years where the smart money is, really you think so? tell me what are the advantages??

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