We are entering a new era. A time when great wealth is being created, and old fortunes destroyed (but not let us dwell there). A time of convergence and disruption that has not been seen in anyone's lifetime.
In the late 90's it was all about expectation and a belief that disruption of existing businesses was imminent; well, a decade or so later it now is. This is why the current (and upcoming) crop of Internet leaders are, well, generating revenues and profits. This is not about eyeballs anymore.
There are three main drivers, and their convergence is unlocking new money making opportunities at an increasing pace:
(1) existing established companies in many fields are being materially impacted by new secular disrupting technology;
(2) the establishments of new cheap, accessible distribution platforms; and
(3) the willingness of large (and small) enterprises to experiment with new way of doing things and work with unestablished companies.
Examples of new secular disrupting technology: SaaS services, cheap cloud storage and processing, powerful mobile platforms (phone and tablet), new touch and motion interfaces, ubiquitous API's, social platforms (i.e. people giving up privacy for fun or ease of access/use), and location based services.
Examples of new cheap, accessible distribution platforms include iOS iTunes, Android, Facebook, Google Apps, and YouTube.
And, finally successful execution by high profile companies, low cost of experimentation, an ample supply of smart unemployed people and a societal recognition that tech is cool, as evidenced by The Social Network.
I cannot think of a time when so much disruption was happening from so many different technologies impacting so many different parts of the economy. Thus I am not in the "It's a bubble" camp, but in the the "It's a bull market" camp. Is this driven in part by cheap money, by a lack of investment returns elsewhere and by a sense of glamor, but those are the ingredients of a good bull market. If I had to guess, I would say it is '96 or '97 again and we have a few more years before a blow-off top that will be called The Second Internet Bubble, or something like that. Right now it is rational to invest in start-ups, though at some point it might make sense to step back. As a professional investor I have to understand when to participate and when to pull back and now is the time to invest and help companies, not hold back. Real wealth is being generated, real jobs created and real change is happening.
Innovation is very much alive in America and gives one great hope for the future of the country.
How The Bubble WILL Come About
I co-joined these two blog entries as no discussion of what is happening does not involve someone raising the concern that we are in a bubble right now. I think, and have argued above, that that is not the case...but, it most likely will be. I can see such a thing happening three or four years from now, when everyone is sucked into the private markets and quite comfortable with their highly illiquid (but seemingly liquid) investments in companies they do not understand and yet they seem to be making money.
Bubble require liquidity and liquidity in private investments is restricted by many constraints, though the following are worth highlighting:
(1) regulation that only allows accredited investors to invest;
(2) regulation that restricts number of shareholders to 500, or burdensome reporting requirements kick in;
(3) lack of information related to how the company is performing; and
(4) institutional investing by mutual funds, brokers, etc. only make size in units of $10mm and so cannot happen until the market caps are sufficiently large (probably $500mm minimum).
I suspect that over the next few years (1) and (2) will be loosened, and (3) will stay the same, but investors will not care. (4) is the real indicator of where the bubble will be. It will be when mutual funds start to buy into private companies pre-IPO in a hot space, it will be when the public can participate pre-IPO through funds set up by the Bulge Bracket firms, it will be when secondary share trading grows to the point that "everyone" starts doing. These will create a false sense of liquidity at the $500mm market cap level and above, and that will give everyone some comfort until it goes away. Professional angels and VC's will probably be more than willing to sell into this frenzy and take advantage of the liquidity provided. Fortunes will be made and fortunes lost, but the bubble will have to be later stage. Can this bleed down to the early stage? Perhaps, but far less so. The numbers are just too small.
Time will tell, but my thoughts are now date-stamped by this post. [Note to self, check back in 3 years.]