Among the things that lead normal, well-balanced people to conclude that the IT industry is crazy are the valuations at which internet companies are launched on the stock market and the prices these companies pay to acquire apparently minuscule start-ups. One thinks, for example, of the $104bn valuation of Facebook when it launched in May 2012. Or of the $19bn that Facebook then paid to acquire WhatsApp last February. And then there’s last Thursday’s flotation of the Chinese internet firm Alibaba in New York, which valued the company at $168bn. (The really big news here is the flotation’s confirmation of the shrewdness of the 2005 deal in which Yahoo acquired a 40% stake in Alibaba for $1bn; Yahoo still owns 22.4% of the company and is expected to sell off some of that after the IPO.)
These are not just telephone-book numbers, but astronomical ones. And not surprisingly they are leading some people to wonder if we’re in the middle of another tech bubble like the one that spectacularly popped in 2000. These fears were given an extra boost by a report published last month by PricewaterhouseCoopers that showed that venture capitalists in the US are pouring increasing amounts of money into tech companies. In the second quarter of this year, for example, venture capital investments in seed stage, early stage and expansion stage companies were up 55% over the corresponding quarter last year, which apparently is the largest quarter-over-quarter growth since the last quarter of 1999 – the last gasp of the first internet boom.
This raises two questions. First, is history repeating itself? The answer is no, because history never really repeats itself. All booms have some generic features in common – outbreaks of irrational exuberance, for example, and availability of cheap money. But the specific circumstances of each boom are different. In the first internet bubble, for example, much of the money was blown on buying servers, renting offices and trying to buy market share in improbable or nonexistent markets (think of Pets.com and Petopia.com). In the current boom, instead of buying servers, startups rent computing time on Amazon’s Elastic Compute cloud service; their “offices” are often virtual (at least at first) and they’re not spending fortunes on advertising. In fact, they’re not paying for advertising full stop. So even if things were to go belly-up there’s less at stake.
A more interesting question is: does it matter if we’re in another bubble? For individual investors, obviously the answer is yes. But for society as a whole, perhaps not. As William Janeway pointed out in his splendid book on innovation, the irrational exuberance that characterises bubbles may also be beneficial in that they generate technologies that will prove significant in the longer term.
If one wanted to be critical, the most annoying thing about the current bubble is the way the visions and ambitions of startup founders seem to have narrowed. Many of them claim, of course, that what they want to build is a company that in the long term will transform the world or disrupt a particular market. But in actual fact their strategy is to create a product or a service that is sufficiently interesting or annoying to induce Google, Amazon, Facebook, Yahoo or Microsoft to buy the upstart venture. The poster child for this is WhatsApp, a fine company with a viable business model that did not depend on monitoring users and which was run by a chap who fervently declared his resolve to build a great, sustainable enterprise that treated its users well. And he doubtless believed that right up to the moment that Facebook offered him $19bn. And who can blame him: you only live once, after all.
At the end of the day, though, what’s much more worrying than the spectacle of venture capitalists blowing investors’ money is the fact that everywhere state funding for the kind of long-term, fundamental research that is needed to produce the technologies of tomorrow has been shrinking. The current wave of innovation and economic development enabled by the internet has only come about because 60 years ago the US government funded the project that produced first the arpanet and then the internet.
Private enterprise would undoubtedly have produced computer networks, but it would not have created the free and open platform for “permissionless innovation” that we got as a result of public investment. And we would have all been poorer as a result.
