Original URL: http://www.theregister.co.uk/2012/07/06/dot_com_froth/
Tech biz today is WORSE than dot-com bubble days
Floating firms like it's 1999
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.