Monday, December 6, 2010

5 Reasons Why We Won't Experience another Dotcom Bubble

Thanks to friends Darin Kirshner and Joey McGirr for listening to me rant about this over coffee. I decided to collect my thoughts and put them down on digital paper.

While perusing my Twitter stream Sunday morning, I saw a tweet from long time blogger and Edelman SVP, Steve Rubel. For what it's worth, Steve is one of a handful of people who I pay very close attention to so I couldn't resist clicking through to the Newsweek article referenced in his update. The title of the article was Dotcom Bubble 2.0 and it focused on the recent speculation by venture capitalist, Fred Wilson that the current environment is looking a lot like the dotcom bust of the early 2000's over again.

While I respect Mr. Wilson and won't pretend to know 1/100th of what he knows about investing in companies, I did live through Web 1.0 and the first internet bubble. I was also a digital frontiersman meaning I know a little bit of which I speak. To that end, I couldn't resist throwing out my $.02 about why the current social media and location-based landscape is nowhere close to the environment of 1997-2001 when irrational exuberance took the world by the throat and temporarily choked the life out of it.

Here are five reasons why we will not live through a "dotcom bubble 2.0:"

  1. Initial public offerings are at an all time low. As a result, the only people who will get burned by investing poorly in startups will be venture capitalists and wealthy folks who make poor investment decisions. NOT the stock market. This is a HUGE difference between 2010 and 2000 (see history of IPOs here).
  2. Because of the bubble, investors, entrepreneurs AND the public learned a thing or two. Ask an entrepreneur or two how easy it is to get VC money these days. Go ahead.
  3. In 1997, it costs hundreds of thousands of dollars to start a business. That's because you needed a website, and infrastructure and lots of other stuff that cost a lot of money. Now, many of those services are free or incredibly inexpensive. That means good ideas are much easier to implement and get off the ground for a $50,000 tab on 3-4 credit cards.
  4. Many of the jackasses in 1997-2001 who got ridiculous sums of money from the VCs ran out and leased expensive real estate, went on wild hiring binges and then invested in things they had no business investing in like Superbowl ads. Think you'll see Klout, Gowalla or Pandora buying a Superbowl ad anytime soon?
  5. 9/11. Yes, this had nothing and everything to do with bubble 1.0. While we'll never know if we could have bounced back more quickly from the first Internet collapse, a catastrophic event that changed the world for ever happened and sent the US (along with many other wester countries) into a tail spin. Now I can't predict that this won't ever happen again but the odds aren't good.
Am I off base? Maybe. But I don't think so. I'll agree that there are similarities between today's business environment and ten years ago but many of the fundamental factors that created the bubble just aren't here. But you know me... I love to be proven wrong.

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