Comments on Innovation Economy: Today's Globe column: What Bubble?

Scott,To me your question is whether or not this l...

2007-11-28T10:37:00.000-05:00

Scott,
To me your question is whether or not this level of activity is sustainable - ie its expanding and can it continue to expand or will it contract due to some currently unforseeable events. Certainly the current sub-prime crisis should tell us something about how external factors come into play in markets in general.

As an entrepreneur, my latest indication of this was a conversation I had with an individual on the Harvard Startups board. I was looking for more people to become involved in a startup in tracking favors owed and given via online networking and it turned out this person was a construction architect of all things. When you have architects trolling the startup boards and interested in joining an internet startup not related to housing - I feel that the level of startup interest is reaching a peak.

I have to believe this indicates a pending meltdown in the economic business sense though as more shaky business ideas will be launched without adequate planning for potentially difficult times ahead. Overall this should be good as it will reduce unreasonable expectations that have been building in the sector.

John Lohavichan
lohavichan@aol.com

Hey Scott, Great article by the way. I agree with ...

2007-11-26T21:09:00.000-05:00

Hey Scott, Great article by the way. I agree with Mike, Hopefully he's got companies like Geezeo in mind when he mentions "many of the companies getting started with modest amounts of capital" ;-)

I think you'll see that many of the startups around town...the ones you see at WebInno, Tech Crunch, Tech Cocktail, OpenCoffee are getting off the ground with minimal investments, and for the most part have much more then a "we'll give it away and make it up on volume" business plan. Most have solid user acquisition strategies and a revenue model.

Bubble or not, it's an exciting and amazing time for the web, innovation and for entrepreneurs. The cost of doing business is incredibly low and with the right team...almost anything is possible.

I know we're glad to be a part of it.

-Pete
http://geezeo.com/profile/pglyman

Scott,It’s only a bubble when you have valuations ...

2007-11-25T12:12:00.000-05:00

Scott,

It’s only a bubble when you have valuations that don’t relate to underlying value. Perhaps the Facebook valuation paid by Microsoft is in that category, but you could argue that they have strategic value to Microsoft, too. Although valuations are up, there certainly aren’t widespread sky-high valuations being paid in the public markets (although I still think that Google is too expensive – and I’ve been wrong about that since they went public!).

Don’t confuse activity with a bubble. There is a lot of start-up activity now, which is very healthy. Most companies are being started with a very modest amount of capital. That is precisely not a bubble. Even first round venture financings are generally modest. Some later venture rounds are high priced in the best companies, but the IPO prices and M&A prices, generally, are within reason. I don’t think it is a problem if there are many, many companies that start with a $1M of capital to see what they can do. We need this type of environment to foster entrepreneurism. Many of these can either sell off at a price which recovers capital, or at least minimizes the loss. They certainly won’t break the backs of the investors.

Compare this to 1999/2000. You couldn’t justify any prices, public or private. I remember a local networking company that raised a first round, just based on a set of slides, of $20M at $120M pre. Companies didn’t have a lot of revenue and had multi-billion dollar valuations. You don’t see this type of activity now. You can always find one or two deals that don’t seem to make sense, but that’s not a bubble.

I do think that VC returns are going to continue to be compressed as there is pressure to over capitalize deals over time, and later stage rounds are generally too big and too expensive. There aren’t enough EquaLogic-sized exits to justify big and expensive late rounds. But, these are at least done in companies that have a real business. So, the returns may be low, but it isn’t indicative of a bubble like we saw at the turn of the century.