Tech biz today is WORSE than dot-com bubble days
Floating firms like it's 1999
Posted in Management, 6th July 2012 09:32 GMT
Watch Now : Virtual Machine Movement with Hyper-V
Open ... and Shut Tech industry titans are fond of reminding us just how different 2012 is than the irrationally exuberant days of the dot-come bubble and crash, and they're right. According to some data, today is even worse.
Worse than 1999? Is that possible?
Definitely maybe. There's no question that the heyday of the dot-com boom was frothy in the extreme. A total of 18 companies between 1999 and 2000 reached the "billion-dollar club," attaining VC-set valuations of $1 billion or more. Today we have over 20 companies in this rarefied class, nearly all of which value has been established in 2011:
Not that hitting the big-time billion-dollar club means a whole lot. Of the 18 companies valued by VCs at $1 billion or more in 1999-2000, 12 soon after went bankrupt or were sold for scrap, a startling 66 per cent. The trend perhaps hit its nadir in 2003 when Zhone Technologies did a reverse merger with Tellium to take its unprofitable business public, and become even more unprofitable.
The problem seems to be that while VCs and tech executives are adept at growing valuations for their companies, they're much less talented at actually building sustainable companies. The problem, unfortunately, may be getting worse, not better.
For example, while 1999 was marked by a desperate mania to thrust anything and everyone onto the web, often resulting in silly companies and sillier valuations, there was apparently much more financial rigour in 1999 than in 2012. According to new data released by Tableau Software's Daniel Horn, the companies that file to go public today have much more revenue than those that filed in 1999, but far fewer are profitable:
The upside, then, is that companies are waiting until their revenues balloon to a healthy $100m. The downside, of course, is that even at this robust revenue, they're still not making money. As an industry, it seems that we increasingly value growth over sustainability. This can't be good.
It would be one thing if growth somehow magically transformed itself into profitability. But there's little indication that this is the case. And if the mostly-profitable IPO club of 1999 struggled to stick around, is there much reason to think that the newly minted IPO club is going to fare much better?
Yes, there are some solid companies in the mix, including LinkedIn and Zillow. But there are far more companies that seem to know how to grow sales but often at the expense of profitability. Groupon has been the poster child for fiscal irresponsibility – its model relying on expensive salespeople (who are now apparently quitting) trying to make up for unprofitable deals by selling more of them.
Again, not every company operates this way. Even within hype-filled markets like Big Data, there are responsibly run companies like Cloudera that manage to grow revenues at a torrid clip while still maintaining profitability.
But such may well be the exception, not the rule. It's troubling just how pervasive the mentality of "growth at all costs" is in Silicon Valley. Though I'm biased in saying this, I look at a company like Alfresco, my former employer, and compare it to Jive. The two companies are similar in their markets and pretty similar in their income statements, including revenue growth. But where they differ is that Alfresco has been profitable for the past three years, and Jive continues to hemorrhage red ink.
Care to guess which one is a public company?
No, this does not mean the sky is falling on Silicon Valley. But unless the Valley learns how to make profits, and not simply sales, we're in for a lot of financial carnage, most of which will be visited upon unsuspecting public investors. ®
Matt Asay is senior vice president of business development at Nodeable, offering systems management for managing and analysing cloud-based data. He was formerly SVP of biz dev at HTML5 start-up Strobe and chief operating officer of Ubuntu commercial operation Canonical. With more than a decade spent in open source, Asay served as Alfresco's general manager for the Americas and vice president of business development, and he helped put Novell on its open source track. Asay is an emeritus board member of the Open Source Initiative (OSI). His column, Open...and Shut, appears three times a week on The Register.
Watch Now : Virtual Machine Movement with Hyper-V
COMMENTS
Very sensible article
You should talk to this guy:
http://www.theregister.co.uk/2012/05/01/startups_who_is_behind_them_who_makes_money/
He seems to disagree with you.
Re: Very sensible article
As you say, they don't talk about quite the same things so I shouldn't be too pedantic.
The key points I would make, though, are these:
Firstly, although the VCs who incubate and market these companies and the people who build them want us all to ignore the question of money because 'this is a disruptive new idea with enormous growth potential', their own keenness to monetise the investment demonstrates that people should be extremely wary. If money now really didn't matter then all of the people involved would be less desperate to IPO and make their millions asap.
Secondly, and more importantly, the problem with the 'web 2.0 allows us to disrupt the market and build a giant empire which will make us hugely profitable' business model is precisely that the internet makes building giant and giantly profitable monopolies which last for generations (IBM, Standard Oil etc.) much more difficult. Even before Facebook is reliably profitable there are a dozen good reasons why they might cease to be relevant in the near future and even Google face threats to their absurdly profitable search business because the monopolistic behaviour and vagueness in explaining their business model is more visible and so less acceptable than for a similarly positioned company pre-internet/
All of that means that even exorbitant growth doesn't justify a valuation which assumes the type of monopoly power Microsoft had in the 90s.
The venture capitalists who push these disruptive startups are glossing over the fact that it's the ease with which business models are disrupted which really makes the internet scary, because if they spelled that out then noone would buy shares in Facebook or Groupon at even a tenth their current valuation.
That's why this is a bubble.
Re: Now the question is not....
That's easy, we'll be left with thousands of self-obsessed individuals with nowhere to blather about their irrelevant yet over-publicised existence.
Inflation causes mal-investment, thus bubbles, then recession/depression.
The root cause of these high risk 'valuations' is too much fiat currency sloshing around, due to ZIRP, central bank fiat currency inflation (e.g. Q.E. and many aliases), and private bank fractional reserve (fraudulent) credit inflation; this always ends up with not enough good investments to put fiat currency in, thus high risk bubbles in bad investments. Inflation is now much worse than 2008, let alone the dot con bubble period!
Obviously any bad investments will eventually fail, and when enough fail the bubble bursts, so lots of fiat currency gets written off, thus deflation, so we get recession/depression; this is cynically called the business cycle; this is a cruel Ponzi scam which ratchets wealth transfers from the Poor and Middle classes to the Rich, each cycle!
This is basically what Austrian Economics predicts, because it is based what actually happens to economies, not some Ivory Tower Classical Economics wishful thinking or blatant Ponzi scams like Keynesian Economics.
Now the question is not....
...if there is a new dot-com bubble of if it is larger, but how we can profit from it.
The first dot-com bubble gave us cheap fibre, essentially eradicating fees for long distance calls. What will be left over with when this bubble bursts?
The new Office Garage series:
Enabling efficient data center monitoring
IT infrastructure monitoring strategies
