In my last post, I linked to something that First Round Capital’s Josh Kopelman wrote in 2007. His post was prompted by — wait for it — a New York Times piece declaring that “Silicon Valley’s math is getting fuzzy again.” We were in a BUBBLE! Ahhhhh!!!!
Reading over that post now, it’s pretty awesome.
As Brad Stone and Matt Richtel reported in October of 2007:
Internet companies with funny names, little revenue and few customers are commanding high prices. And investors, having seemingly forgotten the pain of the first dot-com bust, are displaying symptoms of the disorder known as irrational exuberance.
No, that wasn’t written yesterday — but it sure reads like it was.
"Bubble" proof point #1 from 2007:
Consider Facebook, the popular but financially unproven social network, which is reportedly being valued by investors at up to $15 billion. That is nearly half the value of Yahoo, a company with 38 times the number of employees and, based on estimates of Facebook’s income, 32 times the revenue.
Oh that silly little Facebook with its insane $15 billion valuation.
The company is now weeks away from going public with a market value of around $100 billion. Yahoo, meanwhile, it now worth just under $19 billion. And they’re currently suing Facebook like chickenshits who realize their time is at an end.
Facebook’s revenue is now past a billion a quarter. Yahoo’s revenue last quarter was about $1.2 billion. Profit for the two companies is about the same. What a difference a few years makes…
"Bubble" proof point #2 from 2007:
Google, which recently surged past $600 a share, is now worth more than I.B.M., a company with eight times the revenue.
Google still happens to be right around $600 a share. It’s now worth just under $200 billion. IBM? $239 billion. Guess what? The market corrected itself.
But — Google has closed the gap with regard to revenue. Google’s revenue is now just about half of IBM’s on a quarterly basis. And IBM’s revenue is flat while Google’s is still growing.
Crazy, I know. Such a bubble.
"Bubble" proof point #3 from 2007:
More broadly, Internet start-ups are drawing investment based on their ability to build an audience, not bring in revenue — the very alchemy that many say led to the inflation and bursting of the dot-com bubble.
Again, that sounds like it was written yesterday. Either no startup has brought in any revenues in the past 5 years, or it’s extremely silly to imply that young companies will never bring in revenue because they’re not today. You decide.
"Bubble" proof point #4 from 2007 — a quote:
“There’s definitely a lot of betting going on, and it’s not rational,” said Tim O’Reilly, a technology conference promoter and book publisher.
I’d — wait for it — bet that a lot of investors from back then would disagree. And that’s even when you include the broader economic collapse which had absolutely nothing to do with the tech scene.
"Bubble" proof point #5 from 2007:
Putting a value on start-ups has always been a mix of science and speculation. But as in the first dot-com boom and the recent surge in housing, seasoned financial professionals are seeming to indulge in some strange instinct to turn away from the science and lean instead on the speculation.
Major bonus points for calling the housing crisis what it was, but point deduction for equating the 2007 boom times with the dot-com bust and the housing collapse. Not. At. All. The. Same.
"Bubble" proof point #6 from 2007:
“The environmental factors are much different than they were eight years ago,” said Roelof Botha, a partner at Sequoia Capital and an early backer of YouTube. “The cost of doing business has declined dramatically, and traditional media companies have also woken up to the opportunities of the Web.
“That does open up the aperture for a different outcome this time,” he said.
Wait a minute, not actually a “bubble” proof point at all! A voice of reason! There may just be a reason why Botha is one of the best in the business. Perhaps he should write the next “bubble” post for The New York Times.
"Bubble" proof point #7 from 2007:
Some trace the start of the new bubble to eBay’s $3.1 billion acquisition of the Internet telephone start-up Skype in 2005. EBay’s chief executive, Meg Whitman, reportedly outbid Google for the company. This month, eBay conceded it had grossly overpaid for Skype by about $1.43 billion, and announced that Niklas Zennstrom, a Skype co-founder, had left the company.
Not a sign of a bubble, just simply a shitty deal. Big difference.
And wait, didn’t Microsoft just buy that same company last year for $8.5 billion? Yup. Some will use that as a sign that we’re actually in a “mega bubble” now, I’m sure.
"Bubble" proof point #8 from 2007:
Google’s acquisition of YouTube last year for $1.65 billion, under similarly competitive bidding, might have accelerated the transition to loftier values. Google executives and many analysts argued that YouTube was well worth the price tag if it became the next entertainment juggernaut.
It has. And it’s now a good business for Google. That didn’t stop one analyst cited in the piece from saying “We are almost going back to year 2000 types of errors.”
"Bubble" proof point #9 from 2007:
Twitter, a company in San Francisco that lets users alert friends to what they are doing at any given moment over their mobile phones, recently raised an undisclosed amount of financing. Its co-founder and creative director, Biz Stone, says that the company was not currently focused on making money and that no one in the company was even working on how to do so.
This will be used as another proof point that we’re now in some sort of “hyper bubble”. But Twitter is likely to see something in the neighborhood of $400 million in revenue in 2012. Not Facebook revenue. Not massive. But not nothing. And growing.
Need I go on? Other examples from the article include Geni (which is still around, and paved the way for Yammer, a CrunchFund portfolio company which appears to be doing quite well). And Ning, which ended up selling for around $200 million — right around its perceived (and implied crazy) valuation at the time of the NYT story. Not bad for a “bubble” company.
But here was the most interesting passage from the 2007 story:
Mr. O’Kelley, formerly of Right Media, said other entrepreneurs had begun to think that the financing game is best played by avoiding actual revenues — since that only limits the imagination of investors. “It’s a screwed-up incentive structure, just like you had in the first bubble,” he said.
Compare that with:
“It serves the interest of the investors who can come up with whatever valuation they want when there are no revenues,” explained Paul Kedrosky, a venture investor and entrepreneur. “Once there is no revenue, there is no science, and it all just becomes finger in the wind valuations.”
We’re not just recycling the “bubble” talk, we’re recycling the key arguments behind all of the talk. The dangerous thing here is the implications that the same behavior that led to the 1999 actual bubble is happening all over again. It’s not.
It wasn’t in 2004. It wasn’t in 2005. It wasn’t in 2006. It wasn’t in 2007. It wasn’t in 2008. It wasn’t in 2009. It wasn’t in 2010. It wasn’t in 2011. And it’s not now.
Sometimes it takes — gasp — time to nail a business model. Some startups (and an increasing number, I’d say) focus on this from day one, some don’t. Some take the Google route. Or the Facebook route. And those routes appear to be working out just fine despite what a certain fear-mongering post from 2007 would have had you believe.
Hindsight may be 20/20, but foresight doesn’t have to be as blind as a bat. Again. And Again. And Again.