The return of the Internet-bubble phantom
Oh, man. Not another Internet bubble scare. They just won’t go away.
The first Internet bubble—the so-called dot-com boom and bust—was a decade ago. Since then, the Internet sector has been a hotbed of tiny startups experimenting with new wrinkles in the web’s evolution: social graphs, smartphones, local technology, augmented reality, etc. Some of the ideas are good, some startups become superstars like Facebook, drawing in more capital to similar companies.
And when it happens, someone—usually a prominent VC—blogs about how it feels like an Internet bubble, spawning a news meme. The talk fades after the bubble never really emerges. Look at Google trends for “Internet bubble” and the news volume (the smaller graph at the bottom) shows a spike about every year or so.
The latest scare started, innocently enough, with a blog post last week by Fred Wilson, an influential VC at Union Square Ventures.
[T]here are a few storm clouds out there that we need to be watching. In particular, I think the competition for “hot” deals is making people crazy and I am seeing many more unnatural acts from investors happening. If it were just valuations rising quickly, I’d be a bit less concerned. But we are also seeing large deals ($5mm to $15mm) getting done in a few days with little or no due diligence. Investors are showing up at the first meeting with term sheets. I have never seen phases like this end nicely.
Wilson was careful not to use the word “bubble” in his post but many others read it between the lines. And the web industry isn’t seeing a bubble in the sense that most market historians use. True, engineer salaries are rising because of an imbalance of talent relative to demand. And true, some VCs and private investors are making some bad judgments, but that’s nothing new. A true bubble needs a broad scale, and as long as the rest of the economy remains in the doldrums, any irrational exuberance in the web industry will be just a brushfire of regrettable decisions.
But others are happy to add fuel to that fire. Tuesday, Wilson joined with Kleiner Perkins’ John Doerr at the Web 2.0 conference in San Francisco. Asked about his recent blog post, Wilson recounted the main points with a tired 1,000-foot stare in his eyes, as if he regretted bringing it up in the first place. Doerr responded with a cavalier endorsements of bubbles, although he refused to use that word, choosing to call them “booms” instead. As if that term, with its connotations of destructiveness, were somehow a preferable euphemism.
I prefer to think of these bubbles as booms. I think booms are good. Booms lead to over-investment. Booms lead to full employment. Booms lead to lots of innovation. There was a boom when they started the railroads. We’re in another boom and it’s an exciting time.
It actually sounds pretty idyllic, until you consider that the full employment a boom can bring is inevitably destroyed by the bust—and then some. It’s almost as if Doerr hadn’t been reading about the U.S. economy for the past two years. Doerr’s blind optimism is kind of like saying epidemics are very helpful in pushing scientists to find cures for diseases. It’s especially strange hearing this logic from a VC, since private-equity investors are the ones with the handle on the faucets pouring out all this excess capital.
In the end, bubble scares are like the urban legend of the Vanishing Hitchhiker—nobody really believes it, yet it surfaces again and again, with no tangible proof of its existence. And the evidence of a real Internet bubble in 2010 is scant. But that doesn’t keep people from talking about urban legends.