Let's Not Get Too Cocky About The Blubble

It was just a little over a month ago that I wrote “We’re In The Middle Of A Terrible Blubble!” – a post about the difference between the Internet bubble of 2000 and the “blubble” (as I call it) that we’re in today. The short version of the post is this: venture capitalists like to declare valuation bubbles to fight rising valuations, and the press eats it up because it’s dramatic.

in 1999 the Nasdaq was out of control crazy with no real relationship between stock prices and operating results. We’re not seeing anything like that today, partially because so few companies are going public. And many of the huge-valuation private companies, like Facebook, Groupon and Zynga, have rumored profits that would justify their lofty valuations. And while Twitter is still too cool for revenue, I’ve considered them the exception rather than the rule.

But the market has shifted in the last month since I wrote that post. Things that have happened in the last couple of weeks in particular are worrying me. Well, not exactly worrying me. But making me far less comfortable with the health of the startup ecosystem.

So I scratch my head at Marc Andreessen, who argued today at the AllThingsD Conference that there’s (still) no bubble in tech. His conclusions don’t worry me so much as his logic.

A key characteristic of a bubble is that no one thinks its a bubble,” he says, noting that in 1999, people were euphoric. “If everybody’s upset, it’s a good sign…I hope there are lots of bubble stories.”

Everyone wasn’t euphoric in 1999. There was lots and lots of talk of a bubble. See, for example, this 1999 NY Times story title “Is Frenzy for Internet Stocks a Bubble Waiting to Burst?” Here’s another article in Forbes. And there are lots, lots more.

That’s not saying much. As with recessions, any ambitious economist will predict a bubble every year. No one remembers the misses, but you get an awesome book deal when you’re finally right. “Declare a bubble early and declare it often,” as I said in my previous post.

But Andreessen’s argument that there was no talk of bubbles in 1999 is just wrong.

His other argument is that “It can’t be a bubble because the stock market isn’t acting like it’s a bubble.” Except for newly public LinkedIn, which has a 2,000+ P/E ratio. And ZipCar, which is yet to become profitable so it doesn’t have a P/E ratio, but it’s still worth a billion dollars on Nasdaq.

But the big companies, says Andreessen, still have reasonable P/E ratios. And he’s right. Microsoft was at 72 in 1999. Today it’s less than 10.

And that’s the best argument that things are still sane, because the public markets haven’t gone crazy yet.

There sure are signs, though, that those public markets are aching for a new tech stock bubble. Imagine if Facebook went public today. Think they’d hit a $200 billion market cap immediately? They’re at $75ish billion today on the secondary markets, so why not?

Google’s only worth $170 billion.

That’s the problem. The markets are dying for growth opportunities and they are going to jump on any tech IPO that smells like a winner and price that stock so high that it becomes a loser. The blubble in the private markets today can very easily turn into a real live bubble on the NYSE and Nasdaq tomorrow, and I’m not sure there’s anything that is going to stop it.

And that private company blubble is starting to look more like a real bubble, too. In March, Andreessen’s partner Ben Horowitz argued that private company valuations aren’t all that crazy. “In recent high profile private financing rounds for private technology companies with valuations over $1B, the valuation multiples were at or below corresponding multiples for publicly traded companies such as Google,” said Horowitz.

That was true then (except for Twitter), but there are deals being closed now that blow that argument out of the water. AirBnB, for example, will close a financing at a higher than $1 billion valuation. The company is awesome but they still have very low revenue and certainly aren’t profitable. And most interesting of all is that Andreessen Horowitz will lead the round.

I love Andreessen Horowitz’s swagger and willingness to place big bets on risky things. I just hope they’ve got more behind those bets than a faulty memory of what was happening in 1999 and an argument about private company valuations that they are singlehandedly making invalid.

And, really, they probably do. Because all signs point to a real bubble, probably starting later this year when a lot more companies start to go public. And when Facebook goes IPO, watch out. buy as much stock as you can and hold it for as long as you dare. There will be a lot of money to be made right before everything really goes to hell.