Silicon Valley start-ups awash in dollars, again

Investors seem to have forgotten the pain of the dot-com bust and are showing symptoms of irrational exuberance.
The New York Times

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[nyte3k]

Stupidity flows in cycles...

No surprise here. When people have a positive streak, they tend to throw out common sense and forget history. I'm betting in 10-15 years mortgage companies will be back to their old ways of approving home loans to people who know they cannot afford it again.

[jasonmck]

This bubble will burst through people, not money

This is a great article - thanks for writing up! It is rare that someone actually analyzes the financial dynamics of the current Web 2.0 bubble. So the thing that makes the Web 2.0 bubble different from Web 1.0 is that it is generally a cash-funded bubble. What I mean is that, if you look at the irrational valuations of the Google's of the world, yes, they are valued much higher than they should be, but they won't ever go out of business. Even these smaller startups like Skype, Youtube, Jaiku, Twitter -- most of them probably could have pulled off getting to cash flow positive, albeit at a small size.<br /><br />So lack of cash will not pop the Web2 bubble - what will pop it is when defection occurs (very likely to occur at the same time) amongst investors, employees, and customers:<br /><br />1) Investors realize that companies like Google are facing skyrocketing attrition, approve of sketchy stock granting practices, and lack any internal financial controls that eventually gets them into trouble with Wall street and the stock tanks. <br /><br />2) Employees defect from working at such poorly run companies producing such poor quality products (happening at Google, Yahoo, eBay, and others today)<br /><br />3) The users of these services (being fleeting as they are) just stop using the services. Who's to say that kids are going to be using Facebook or Twitter in 2010. It'll be old news by then.<br /><br />The effect will be similar to when a really popular TV show like a Friends, Seinfeld, etc goes off air -- an entire economy implodes because investors, employees, and consumers defected.

[Sea of Cortez]

This is even worst than 1st bubble

At least in the 1st Internet bubble companies had revenues and not profits. In the case of Web 2.0 so called companies, they dont even have any revenues. What is happening now is the same exact game that was played during the previous<br />Internet bubble: that is VCs in Silicon Valley find a company run by a couple of cutsie 20 year olds, graduated from Stanford most likely, they do a 1st round of investing at 5 Cents per share, 2nd round at $5 per share, and in the 3rd round they<br />will either dump the stock of this junky companyon the public or get Google to buy it which is an indirect way of dumping the stock of this junky company on the public.<br /><br />It is amazing how nothing of real value is coming out of USA anymore, I mean Japanese invest and give us Prius that gets 50 Miles per Gallon thus cutting our gas bills by half at least, French invest and give us Airbus 380, TGV, etc. making<br />Travel so much more pleasurable and affordable, and what do we get out of USA: absolutely nothing useless Second Life, Tweeter, Ning, iPhone, etc.<br /><br />And of course as a result of providing useful products that people actually buy, European economies are doing much better as evident by the much stronger Euro vs Dollar and as evident by real estate prices rising 20% year over year in Europe while foreclosures are hitting all time high in US.<br /><br />But what do you expect, Europeans get Universal Health care &#38; Education and more for their Taxes while Americans dont, and as a result Europeans are getting more educated all the time and thus putting out valuable products and services<br />while US (Silicon Valley) gives us one useless Web 2.0 company after another.

[jamal_shah]

.crash 2.0

Some good points made in this article, and built upon further by this blog post I just read:<br /><br /><a class="jive-link-external" href="http://techlahore.wordpress.com/2007/10/17/dot-bust-20-how-will-it-play-out-this-time/" target="_newWindow">http://techlahore.wordpress.com/2007/10/17/dot-bust-20-how-will-it-play-out-this-time/</a><br /><br />I agree that there is value in web 2.0, but as the point is made in the above blog, VCs over investing in an area makes it harder for their own investments to succeed! Kind of like too water being necessary for a plant, but too much water killing it..

[Sea of Cortez]

Useless companies = Silicon Valley Web 2.0

At least in the 1st Internet bubble companies had revenues and not profits. In the case of Web 2.0 so called companies, they dont even have any revenues. What is happening now is the same exact game that was played during the previous<br />Internet bubble: that is VCs in Silicon Valley find a company run by a couple of cutsie 20 year olds, graduated from Stanford most likely, they do a 1st round of investing at 5 Cents per share, 2nd round at $5 per share, and in the 3rd round they<br />will either dump the stock of this junky companyon the public or get Google to buy it which is an indirect way of dumping the stock of this junky company on the public.<br /><br />It is amazing how nothing of real value is coming out of USA anymore, I mean Japanese invest and give us Prius that gets 50 Miles per Gallon thus cutting our gas bills by half at least, French invest and give us Airbus 380, TGV, etc. making<br />Travel so much more pleasurable and affordable, and what do we get out of USA: absolutely nothing useless Second Life, Tweeter, Ning, iPhone, etc.<br /><br />And of course as a result of providing useful products that people actually buy, European economies are doing much better as evident by the much stronger Euro vs Dollar and as evident by real estate prices rising 20% year over year in Europe while foreclosures are hitting all time high in US.<br /><br />But what do you expect, Europeans get Universal Health care &#38; Education and more for their Taxes while Americans dont, and as a result Europeans are getting more educated all the time and thus putting out valuable products and services<br />while US (Silicon Valley) gives us one useless Web 2.0 company after another.<br /><br />P.S., Sorry if this post appears 2 time. Meant to post it once only.