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Fear of another tech bubble as web start-ups enjoy largest investment flows for a decade
Reuters in New York
10 May 2011
The tantalising prospect of finding the next Facebook, Groupon or Twitter is driving the biggest rush of venture capital into the internet start-up arena since dot-com mania first boomed and then fizzled out more than a decade ago.
More than US$5 billion of venture capital investment flowed into young web companies globally in the first four months of the year, data from Thomson Reuters shows.
Although small compared with the boom years, the sum puts this year on track to be the busiest in dollar terms since 2000, when more than US$55 billion was deployed to back nascent technology firms.
The latest frenzy bears some of the hallmarks of the previous web investment craze - exuberance over “concept” start-ups that have not launched their sites and intense competition among potential backers to place bets in presumptive hot spots, such as the social media space now defined by the likes of Facebook and LinkedIn.
Entrepreneurs such as Clara Shih, the chief executive of Hearsay, a San Francisco-based speciality software provider, enjoy more leverage with investors than last time and talk about having their pick of potential backers.
Shih said she had already raised US$3 million, when cash came knocking at her door.
“Honestly, we weren’t thinking of raising money, but now it’s kind of landed on our lap, we may be open to it,” Shih said.
Herd investment behaviour gives rise to talk that another internet bubble is forming, particularly when analysts see valuations on the order of US$70 billion for Facebook and US$15 billion for Groupon calculated from private investments.
“I’ve heard ... many venture capitalists who are saying, ‘No, there’s not a bubble,’” said Dana Stalder, a partner in the Silicon Valley office of the venture capital firm Matrix Partners.
“When you’re seeing valuations double in the last 12 months for the same company, the same team, it feels like a bubble to me.”
But other characteristics of the current boom do set it apart from the one that collapsed 10 years ago:
* Venture capital investors say more of today’s young companies are profitable or on a clearer path to profitability as the advent of cloud computing helps to lower operating costs dramatically from a decade ago
* Online advertising and e-commerce, in their infancy a decade ago, have matured into accepted and more reliable revenue sources
* The rush to cash out through an initial public offering has slowed. Bountiful sources of private investment, a raft of new public company disclosure regulations and the growth of alternative venues for trading private company shares provide the means and incentive to delay going public
Perhaps the most distinguishing factor from the “It’s different this time” litany is that today’s web frenzy is global.
In the three years that marked the height of the last boom, 1999 to 2001, the venture capital industry sank US$96.4 billion into web start-ups, with more than 80 per cent of that, or nearly US$78 billion, in the US alone, the Reuters data shows. Of 10,755 venture capital deals over that run, 7,174 took place in the US market.
Not so today. Of the more than US$5 billion of venture capital money invested so far this year, just US$1.4 billion has been deployed in US start-ups. About 75 per cent of the 403 deals have taken place overseas.
Moreover, it is the big deals that as often as not are now happening outside the US. Of the 25 biggest consumer internet deals last year, 15 were non-US investments, according to Quid, a Silicon Valley research start-up that tracks venture capital investment flows. Nearly half, 12, were Chinese.
The investors as well as the start-ups have an increasingly international flavour. Perhaps the most notable new face among today’s internet kingmakers is Russian billionaire Yuri Milner, the chief executive of DST Global.
While one of the distinguishing characteristics of the new boom is the tendency to remain private for a longer period, the market for initial public offerings is nevertheless filling up with internet names.
So far this year, 16 web firms have filed listing documents with US securities regulators, seeking to raise proceeds estimated at nearly US$4.1 billion, according to Reuters data. That already tops the full-year totals for every year except 1999, when 52 companies filed to raise US$4.2 billion.