January 31, 2011

This Valley Bubble is Not of Valuation, but Optimism

Having worked at startups practically my entire adult life, with more than 12 years in Silicon Valley, I distinctly remember the hallmark elements of the dotcom rise and fall, the rise of Web 2.0 companies and the fizzle of most, and I am seeing people talk again in similar ways about whatever state we are in now - with an almost giddy eagerness of people to claim that a world with skyrocketing valuations for companies like Twitter, Facebook, Groupon, Foursquare and Quora is one that is a bubble. I don't think that this is the case. These elite private companies are possibly fairly valued, much more so than the vapor dreams of years past, and the very real disconnect is in fact, more closely related to the Valley's separation from the outside world, one more fraught with concern and continued pessimism following exposure to the world's most dire economic crisis in generations.

In the late 1990s, as most of us know, companies with almost zero business plan were going public on pageviews alone. Companies that measured Web statistics, like Media Metrix, were turned into rockstars, vying for time on CNBC. Even Media Metrix itself filed to go public in early 1999, raising $51 million in an IPO, eventually trading under the ticker symbol of MMXI. There were stories in the press of companies that filed to go public on the very day their Web sites were announced. Many companies were public entities despite never having turned a profit at all.

In parallel, companies that had plans of going public could easily command double digit million dollar raises. The company I joined in January 2001 raised $72 million at a valuation of more than $350 million, on the hopes of a strong beta plan at customer sites. The company eventually raised more than a quarter billion dollars, including subsequent $47 million and $29 million chunks during tougher times, and is still out there, not having gone public or having been acquired, despite a false-start $100+M IPO filing ourselves back in 2007.

That world is much different than what we have now. Facebook and Twitter and Groupon, all valued in the billions of dollars, are the exception, not the rule. Facebook and Groupon are both suggested to be potentially in the billions of revenue already, and Twitter has established itself as a household name with a morphing business model. Meanwhile, even my wife has seen value with Foursquare coupons and loyalty programs, and Quora is getting incredible visibility with early adopters, becoming a potential top property for the future.

Below this lofty echelon of companies, I am not seeing the bubble-like activities that have marked years past. Funding rounds are usually being announced in the single digit millions, or less. For every big investment from Digital Sky Technologies (DST), startups are fighting for their first $150k at Y! Combinator. I have spoken to many small companies who are finding today's angel investor climate challenging - where good ideas are competing with other good ideas, and wallets are tentative. But the optimism remains. Maybe rounds that took weeks to months to close in the past can take six months or more now, and maybe valuations are lower and total amounts raised are less high, with real revenue and profits being required.

Meanwhile, as we debate valuations and revenue, world news is still difficult. On a recent drive home, the hourly news talked about record high gas prices, and potential inflation - offset only by continued high unemployment, which helped to keep costs down, with demand being down as well. This news was followed by comments that unemployment numbers were making progress, only because many long-time job seekers had given up. Next, we heard from continued depressed home prices, and high foreclosure rates, with the state of California possibly needing to file bankruptcy, assuming drastic measures would not be taken to get back into the black after years of overspending versus tax receipts.

The dramatic disconnect between our debates of rockstar founders and infighting for designers and developers versus doubling class sizes, tax hikes, unemployment and home losses is a much bigger issue in my mind than that of assumed valuation issues and any "bubble." I don't think there is a bubble. Not like before and not out of control at all. Facebook is growing a tremendous business, as is Groupon. Twitter is just behind. LinkedIn was patient, and now has revenue of greater than $160 million a year, before filing to go public. This is no bubble. It's a new tougher reality. But we can't be blind to the world outside us which continues to struggle.

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