Are You in a Bubble?

Many people are talking about IPOs and bubbles, because it sells. Let’s jump in while the water is warm.

I see the question “are we in a bubble?” asked pretty often these days, and I think it’s the wrong question to ask. It’s like asking “are we in Ukraine?” which I can answer easily for myself: [waiting for location… ] no, I’m in the US. Are you in Ukraine by any chance? привіт to you 🙂

 Of course, bubbles always exist. Some are big, some are small. They are all unique, like precious snowflakes. I rode the dotcom bubble, and luckily I got a little bit more than a lousy t-shirt. That one was pretty big, and when it popped the effects could be felt in other sectors of the economy. I do see an obvious bubble now, but it is much smaller: the Facebook ecosystem.


(from flickr)

Why is it a bubble? I’m not going to get into what Facebook is worth, or should be worth. No one can say. The more important issue is that Facebook is now flush with cash, and in a race to justify its valuation. That means desperately exploring ways to monetize its (almost maxed out) audience by building / buying new technologies. The buying part is where the bubble is: this is why Instagram could be acquired for one billion dollars, and why Pinterest is valued at more than that. Anything that Facebook may want to buy is likely overvalued now. Notice that I’m not saying that Facebook won’t justify its valuation one day, what do I know. I’m just not optimistic about it.

At the same time, there are lots of tech companies creating sustainable businesses while flying under the radar of the tech press (possibly because of the Facebook hype). Tech in general is not a bubble for sure. IT is evolving, cloud infrastructure is here to stay, Software-as-a-Service is becoming prevalent, etc. Take GitHub as an example: those guys are a bootstrapped company, providing a service that’s extremely valuable to businesses around the world. There are rumors that they are raising capital, which is what I would do in their place; they can set themselves up to be a big player in the enterprise space, where the big bucks are. I would bet some chips on GitHub any day if I could, and I wouldn’t touch Pinterest with four pairs of latex gloves.

As an aside, this is why I’m more optimistic about niche social networks like LinkedIn: they make a ton of money from their hiring solutions business. As long as enough industries are doing well, LinkedIn will make money from recruiters. Of course the global economy could collapse, in which case we’re all screwed (that reminds me: I need to stash some canned tuna, fresh water, and zombie repellent in the basement). 

On the other hand, the Facebook bubble could pop any day. Most of the world would barely notice, and LinkedIn would still get business from other growing industries. Disclosure: I own LNKD shares.

Parting thought: some bubbles are self-referential. Because nobody knows what a growing industry should be worth, enough people believing that we are in a bubble can spark fear and uncertainty. This in turn could cause a panic-based sell-off. From this little soapbox of mine, I kindly ask the tech press to keep things sane by doing responsible research.

By the way, I searched videos for “bubble” and found this movie trailer. Now I want to watch it.

Hacker News submission for this post if you’re interested.


5 Replies to “Are You in a Bubble?”

  1. If I had a company that made $1 per year, would you pay me $600 to own it?That’s about what LNKD is valued at, which is insane. There’s definitely a (startup) bubble and you’re right smack in the middle of it.

  2. That’s a fair question, and my point was along the lines of a comparison between the two. It’s easier for me to imagine scenarios for LNKD to yield a reasonable return over the next 10 years than it is for FB. In the short term, nobody knows. As an example of what I mean, AMZN crashed horribly with the rest of the dotcom bubble 10 years ago. Look at them today.

  3. There’s obviously a huge startup bubble, with Facebook at the top of the stack, and loads of other stragglers vying for acquisition opportunities… but I’m curious, how do you feel about Mobile specifically. The mobile space is seeing enormous investment, and is being billed as the future of personal computing. I think there’s a lot of truth in that, but there was also truth in the .COM boom about it being the future of business. The problem isn’t betting on the future, it’s over-betting. As a young person who’s highly interested in mobile technology, all these booms and busts make me want to bootstrap more than anything, but it’s very difficult in my (financial) situation to persuade people to share my vision, so seeking investment is really tempting also. So… are we in a bubble? Yes. Should I still try to ride it?

  4. I think your article is relevant because it has a good foundation, and foreboding. Also this latter can be painful for those not in the subject.

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