It pains me to write this post, but John Battelle did millions of people a disservice on the New York Times’ Op-Ed page yesterday. He tries to make the argument that the second DotCom Boom, which Silicon Valley in now enjoying, won’t lead to a second DotCom Bubble and stock market crash. The idea sounds very pleasant, but his argument deeply flawed and dangerous for all involved.
Certainly, there is no Internet investment bubble right now in November 2005, fifteen months after the Google IPO. But, so what? It’s an irrelevant observation. In November 1996, fifteen months after the Netscape IPO, there was no Internet bubble either. As John correctly points out, it’s great that startups are cheap to create and that Internet advertising can now provide a revenue stream for web sites. However, he somehow makes the leap of faith that cheap web servers and Google ads indicate that the IPO window is permanently closed and that stock market abuses are behind us. Because the New York Times printed it, far too many people will believe him.
In direct contrast to John’s conclusions, it’s clear that promoters of Internet businesses, including me, are in danger of repeating the mistakes of the late 1990s. This fact became painfully clear to me during a discussion at Supernova in June of this year. A senior exec at a very high-profile blogging startup started praising the almost unlimited productivity increases that blogging, RSS, and related technologies provide. I asked him if his view didn’t sound worryingly like the claims attached to the web and e-commerce in the late 1990s. His response was perfect nonsense, “Scott, you don’t get it. This time it’s open source.”
It’s exactly the sort of nonsense that many employee options holders and small stock market investors believed the last time. Many of them are still recoverying from the financial hardships created by that belief. The few accounting and securities reforms instituted after the DotCom Crash are weak and getting weaker. They will not unto themselves prevent another abusive cycle. The lessons we all learned from the first DotCom Boom, Bubble, and Bust are quickly fading in the race to start companies for Google, Yahoo, and NewsCorp to buy. The investment bankers who are currently cut out of the loop will find IPOs to peddle in order to take their share. It’s their job, and they’re generally pretty good at it.
I’m not suggesting that we stop creating Internet businesses. I’ll be full-time at my next startup within 90 days. However, we each need to take personal responsibility for how we build them and how we represent the investment opportunities they provide. We need to hold our employees and service providers to a standard that will prevent as many of the excesses as we can. After reading John’s column yesterday, I’m worried that optimism and greed will out-shout realism, clarity, and responsibility — again.
A Prediction: The second DotCom Bubble will inflate and burst no later than mid-2009. The bubble will be inflated by startups funneling venture capital into Google and similar performance-based ad networks, buying customers on whom they lose just a little money each time. These startups will be funded on valuations somewhat inflated by Google’s stock performance. They’ll drive up the price of Google keywords beyond what is economic. Just like the last time, many private company investors will have a hard time tracking the total cost of customer acquisition while sitting on twenty boards of directors and seeing six new deal pitches a day. Eventually, when the startups are no longer able to raise money, they’ll quit buying Google ads at inflated prices, noticeably hurting Google’s growth and multiples, ending the cycle quickly.
[Disclosure: Joe Kraus, mentioned in John's Op-Ed piece, is an angel investor in Feedster, a search engine startup where I was CEO until recently.]
You are right, but there are many more good business models this time around - its just that open source blogging RSS whatever is not one of them.