Monday September 19, 2011 – Greg Scoblete
A sustained period of low interest rates, a rash of tech-sector IPOs with soaring share prices, fawning media profiles of Silicon Valley entrepreneurs and venture capitalists - for many in the tech industry, it's déjà vu all over again.
I'm talking, of course, about a bubble. The last time the tech industry was in the grips of these dynamics was at the turn of the century, when the Internet was minting millionaires at an unseemly clip and Initial Public Offerings ran the Nasdaq up to a dizzying height. Today, the names have changed but the similarities are eerily familiar.
Or are they?
In truth, while many of the macro-economic conditions that gave rise to the Dot Com bubble are the same, the world has changed. For one, the Nasdaq is worth roughly half of what it was during the Dot Com era. If another bubble is forming, it may have considerably more headroom before it pops.
More importantly, the tech firms are different. As Daniel Hom of IPO Dashboards has observed, some of the big technology firms that have made their IPO or are nearing that point are actually (gasp) profitable and most are generating hundreds of millions in revenue. The business models, in other words, are already being subjected to a real world stress test and many are enduring. Companies like Facebook and LinkedIn have also been incorporated for longer than the ill-fated poster child of the Dot Com bust - Pets.com (which, we must all remember, burned through $300 million in investment capital in about two years before being put to sleep).
Finally, the Internet is more mature. There are roughly 10 times more people online today than there were 10 years ago and a slew of mobile devices and operating systems have created an entirely new eco-system of applications and opportunities for investment.
That said, the greatest delusion when analyzing any market is the assumption that "this time is different." Even if we're not in a tech bubble today, it's hard to imagine a prolonged period of low interest rates not producing some speculative mania somewhere. Indeed, while LinkedIn and Facebook may hum along profitably for many years to become, the explosive growth of venture capital-funded mobile apps certainly appears a bit, well, frothy.
