The Venture Business is a Bubble Business, Part XXIV

Lots of people talking about the TechCrunch party last Friday, and many musing whether 700 people on a VC’s patio (plain on a snake’s patio!) denotes some sort of bubble 2.0 for all things web 2.0. Typical is Dave Hornik below:

But despite the excitement and anticipation surrounding the party, it didn’t feel like 1999 to me at all. The talk was not about who’s the latest millionaire. The talk was not even about who’s got the biggest traffic or who is growing fastest.

And that’s the problem. Building companies for a supposedly fast-growing market without significant numbers of people getting stupidly wealthy shows that capital is almost certainly misallocated here. To justify so much money going into early-stage companies doing web 2.0-ish stuff, we should be seeing more hand-wringing about the absurd amounts of money being made by a select few entrepreneurs. But we’re not.

Remember my rule: The venture business is a bubble business. The industry owes its existence to its participants’ ability to find and exploit liquidity bubbles in technology markets. In this case there is a bubble, but it’s entirely at the company creation end of things, not the liquidity end (i.e., IPOs and M&A), which makes it the strangest and least economically rational technology bubble I’ve ever seen.

Why? Well, what’s the financial point of a biztech bubble where oodles of money goes in,  but next to no money comes out? At least in the dot-com days we’d had a few moonshot IPOs before people really began pouring money at MBAs who secretly craved to run online cat food stores.

Related posts:

  1. More Bubble Trouble for Venture Investors
  2. Venture Business Blows Bubbles
  3. Alan Greenspan: How I Spent My Bubble Bursting Days, Part II
  4. A New Venture Bubble
  5. Please Google, No New Products — Part XXIV

Comments

  1. Chris says:

    It really is a funding bubble, and I think the high amount of company creation, at least with web companies, is just a result of advertising networks (adsense, etc). I don’t think people are any more entrepreneurial — that’s for sure.

  2. Blissex says:

    The industry owes its existence to its participants’ ability to find and exploit liquidity bubbles in technology markets. In this case there is a bubble, but it’s entirely at the company creation end of things, not the liquidity end (i.e., IPOs and M&A),

    But there is an M&A liquidity bubble: old media or whatever companies are buying web 2.0 companies for really fancy prices, hoping they get a MySpace style Google or Yahoo! deal.
    MySpace/NewsCorp and NewsCorp/Google are the leading lights, everybody wants something like that.
    BTW, the VC business has not always been a bubble business: 20-30 years ago it was about building value and even sometimes income streams. Then capital gains tax was taken a lot lower than income tax, and the rest is history, ahem bubbles :-) .

  3. John K says:

    I like this Kedrosky rule about the VC business. It makes sense.
    I also like it because, pyschologically, it explains your proliclivity to declare any other volatile market a bubble.

  4. You’re right on target. I’ve already seen a few business plans for startups where high burn rates are back and revenue streams take a back seat to “building community” and “user experience.”
    Don’t forget, though, VC’s are chasing thewWeb 2.0 companies because SOX has made IPO’s more challenging. Web 2.0 start-ups promise a quick new media fix and a youth demographic.
    On the other hand, The National Research Exchange http://www.researchexchange.com and IRN http://www.independent researchnetwork.com may make capital more accessible to companies who have a chance to go public. Even orphaned public companies (without analyst coverage) can put misallocated capital to better use than the latest AJAX mashup.

  5. Marc Burch says:

    I’m looking at a number of deals where the valuations are too high. Powerset is a great example. We are in a bubble.