Are we in a new tech bubble which most of us aren’t even aware of? It is certainly quite possible and one thing we have all learned from experience is it is better to be overly cautious than to get burned in yet another frothy explosion.
One observation worth sharing is the rapid spread of information through the Internet means bubbles seem to grow bigger and faster as information flows more freely to those people who want to invest in whatever the latest craze is.
A recent New York Times article discusses the sky-high valuations of so many of today’s startups from Twitter valued at $4B to Zynga valued at $5B! Then there is Groupon at over $6B.
VentureBeat has an article on the matter worth reading as well.
In short, these aren’t public companies that are witnessing these massive valuation increases – most are private and are seeing their values increase as VCs are stepping over each other to be part of the next Facebook. And many established tech companies have plenty of cash and want to add fast-growing companies to their mix of solutions. Some have VC arms investing in these new companies as well.
Fred Wilson a well-known and successful VC had this to say this past November 12th:
However, there are a few storm coulds out there that we need to be watching. In particular, I think the competition for “hot” deals is making people crazy and I am seeing many more unnatural acts from investors happening. If it were just valuations rising quickly, I’d be a bit less concerned. But we are also seeing large deals ($5mm to $15mm) getting done in a few days with little or no due diligence. Investors are showing up at the first meeting with term sheets. I have never seen phases like this end nicely.
One last point – many of these these companies are all likely going to make money – and quickly. The viral nature of the Internet today means they can gain customers at alarmingly fast rates and if they can find innovative ways to monetize their efforts, the rest as they say is history.
If not, well we’ll be seeing some pretty sad investors in the future. Because as we all know well… Once these valuation increases start and investors look to outdo each other and compete for the prize of being associated with hot new companies, something drastic must happen to change sentiment. And drastic events at market tops are never good.