Why There is No Web 2.0 Bubble

bubble.jpgI have been working on this post for some time now, and for a variety of reasons, simply have yet to finish it. However, after reading today’s offering by Alex “Semper Fi” Muse over at the Texas Startup Blog, I am scrapping my efforts on this front. He has managed to summarize my thoughts in a way that has eluded me; so instead of mirroring his efforts, I will simply add a few comments.

You can read Alex’s post here, but I will offer a few thoughts to go along with what he (and Fred Wilson and Paul Kedrosky) are saying.

First, to have a “bubble”, there has to exist something to exert upward pressure, generally around pricing, cost, valuation, etc. I see nothing doing this, for all of the reasons pointed out in Alex’s post. VCs are active, but they are certainly not investing at the levels we saw before. There are certainly “pockets” of heavy investment, but nothing on the scale preceeding the stupidity-parade of the late 1990s.

Another point I’d like to make is that the bursting of ye olde digital bubble in the late 1990s affected most major markets. Atlanta, for instance, was one of the heaviest hit areas back then. The investments back then were fast, furious, and all over the map.

That simply isn’t the case now. Believe me, there is no Web 2.0 bubble here in the southeast. Most investors here couldn’t tell you the first thing about Web 2.0. They are still largely continuing to lick their wounds.

The key point, to me at least, in Alex’ post was his statement regarding the lack of copy-cat investments. This is a HUGE distinction from the 1990s. If one online dog food company secured a round of $5M, three more received $10M, with a fifth startup receiving the $50M warchest. That is not the case now; with a few exceptions – such as the rush to solve the world’s “video file sharing problem.”

What we see now are lots of bootstrapped startups, with the VCs letting a “clear” winner rise to the top, and then infusing capital into that player to bolster their postion. Instead of investing in lots of copy-cat plays, VCs are now searching for those plays that complement those other portfolio investments. In other words – taking previous investments to the next level. Big difference.

And has been pointed out by everyone already, the deal sizes are not at pre-bubble levels, which in effect reduces the impact of failures.

I’d be more worried about the housing/real estate bubble.



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