Practical Economics


A Tech Bubble? What Tech Bubble?

Today’s social networking is far different from the dot-com craze that blew up in 2000.



Sky-high valuations for social media companies don’t signal a bubble in the tech industry à la the dot-com bubble, which burst in 2000.

Although some analysts see similarities between the two eras, the massive worth assigned to such private firms as Facebook, Twitter, Groupon and Zinga, is not, on its own, a sign of trouble ahead.

There are many differences between then and now.

For starters, the newer firms are on fairly firm financial footing. Facebook, linking 600 million people around the world, and Groupon, a mass coupon provider, are said to have annual revenue in excess of $1 billion each. The average for all tech firms going public in 2010 was $300 million. That’s more than double the average of $120 million in revenue for similar firms at the height of the dot-com boom.

During the dot-com bubble, valuations for public and private companies (most social networking companies are still private) were about equal, but today valuations for social networking companies are below the valuation multiples for public companies such as Google. In the late 1990s, valuation multiples were more than ten times higher than today.

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Today’s younger companies are in no rush to go public, unlike earlier firms that rushed to sell shares, bringing many inexperienced investors into the picture.

A driver of a bubble is the oversupply of venture capital in the market, which isn’t the case now. Between 1998 and 2000, venture capital firms raised as much as $200 billion, equal to 0.55% of GDP -- more than in the previous 18 years combined. More recently, between 2008 and 2010, venture capitalists raised just $55 billion, or 0.12% of GDP.

Instead of issuing an initial public offering this year, Facebook, for example, raised $5 billion through a financing vehicle managed by Goldman Sachs, which attracted many savvy investors.

Moreover, the explosion in Web usage helps to keep today’s online sites profitable and growing.

Although expectations were high for the Internet during the dot-com bubble, the reality was not there. The consumer Internet market 10 or so years ago totaled 55 million people -- compared with 2 billion today -- and half of them were on dial-up connections, making for slow and cumbersome Web use. Expectations outstripped the reality. Today consumer bandwidth is 100 times what it was then, thanks to DSL, cable modems and high speed wireless.

Plus changes in technology have at the same time made it easier to start companies and have created huge new markets for those start-ups.

In the late 1990s start-ups spent quite a lot on office space, servers and equipment. Today, much of the infrastructure is in the “cloud” -- on servers maintained by other companies -- allowing entrepreneurs to focus more on the product than on building an infrastructure to support that product.

Furthermore, the move to cloud computing and mobile applications is opening up whole new areas of applications for today’s start-ups.




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