May 29, 2012

What are the chances that we are in the midst of a second tech bubble?

Most of us probably remember the tech bubble of the 90s, when you could pretty much add .com to the end of any word and get start up capital thrown at you by the millions. I may be exaggerating, but not by much. Unfortunately, that "tech bubble" burst, and a lot of people lost a lot of money as a result. It seems that we are seeing a lot of high profile tech IPOs recently, and once again millions, nay billions, of investment dollars are flooding in. I can't help but wonder if we are seeing history repeat itself, and another crash down to reality is going to occur, with lots of people loosing lots of money, and legitimate start-ups faced with difficulty obtaining funding as a result. Am I paranoid, or is my spider sense tingling valid?

Perhaps, but if so, it is quite a bit different than in the 90s.  Back then, investors were backing concepts that often existed in no form other than a business proposal.  You had a lot of people, some of them very bright, with little concept of how to actually form and operate a for-profit company.  There are lots of headaches involved in the everyday operation of a business, from regulatory compliance to keeping office supplies stocked, and many of the start-ups in the 90s had no understanding of that.  Many failedat least partially due to their lack of business management and operational experience.


Today you have some companies that are founded on what seems to be questionable business models, but they generally seem to have adequate corporate governance, with some possible exceptions.  Facebook may ultimately fail or succeed, but if it does fail I doubt it will be because of an inability to perform the basic functions of a business. 


Jimlynch makes a good point about the performance of Facebook suggesting that we are not in a tech bubble, although I would make the counterpoint that if you look at Facebook's P/E ratio, it is wildly overvalued even with the correction to stock value that occurred following the IPO.  Same with Zynga.  Still, this is different from the 90s when you saw stock prices climb to atmospheric levels for no logical reason other than "it's an internet startup".  You do have a few examples like Facebook and Zynga, but there aren't 1000s of fly by night companies hoovering up capital like it was back in the day.  

I think the poor performance of the Facebook IPO (it's down around $29 as I write this) shows that we aren't in a tech bubble at all. If we were, Facebook would have gone way up. Now it's down nearly $10 per share from the first day of the IPO.

So I wouldn't worry too much.
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