The never-ending "We are in a Bubble" meme

This is probably the most asked question in general interviews or panels? The answer most of the time being in the question of who's asking. Are we in a bubble? . Media in particular, hungry for sensational posts, are definitely trying to spot something wrong in the cycle of the web industry. But not only them. I start to hear this more and more from the investor community but also from entrepreneurs.

I had an interesting conversation with my colleague Daniel Cohen about that. And he wrote a very good post about why in Israel people believe more there is a bubble than in the US.

I have been shouting for months we are not in a Bubble. Not even close to. Today i stumbled upon a great post by Marc Andreessen (founder of Netscape and Ning) about the non-existing bubble and in particular the impossibility to predict or anticipate one and i believe he's right.

The whole structure of how the technology industry gets funded -- by venture capitalists, angel investors, and Wall Street -- is predicated on the baseball model.

Out of ten swings at the bat, you get maybe seven strikeouts, two base hits, and if you are lucky, one home run.

The base hits and the home runs pay for all the strikeouts.

If you're going to call a bubble on the basis of lots of bad startups getting funded and failing, then you have to conclude that the industry is in a perpetual bubble, and has been for 40 years.

Yes too many companies are funded. Yes valuations are raising. Yes most of companies won't make it and investors will mostly fail. But this is not a Bubble. I think a new word should come up to qualify the existing situation. But certainly not Bubble. Why? because even if all of this happens, there will always be more internet users, advertisers will still switch their offline media budget to online, and people will still and more buy over the Internet. In a word the health of the internet economy is not at all related to its funding cycle.

Other parameters may create a bubble. Global economical recession for example, or other macro economics parameters that will impact the growth of online advertising and the health of giants like Google.

So why is the Bubble2.0 meme growing? One of the reason is because i believe many do not really analyze the situation correctly and narrow their understanding by focusing only on the funding cycle. It is a common thought for example to hear there is no business model in web2.0. Wrong (look MySpace, Facebook, PhotoBucket, Habbo Hotel, StarDoll.. recently acquired FeedBurner, or even none funded startups like HotorNot). And i could go on with the number of discussions i had in the past proving that (in particular in media) the market is not understood well which leads to wrong conclusions. Another reason is explained by Marc in his post by declaring we are naturally eager to spot bubbles anytime something unusual happens in an economic cycle. 

I am not saying there could not be a bubble. I say that if you base your judgement only on rate of startup creation and funding cycle then you should think twice. Again read Marc's post. 

Comments

[Scott Rafer]

I can't entirely agree. I don't think that there is a bubble going on, but there is still a tech funding and business cycle. We all care less about the funding cycle than we used to, but we still care somewhat. We are 7+ years since the last top in what is normally an 8- to 11-year cycle. Because we haven't risen that high just means that we won't drop that low. I'm of the opinion that the US presidential election next year will end the cycle, due to Republican incumbents traditional economic shifts that benefit asset-heavy industries. We'll see.

[Sramana Mitra]

Hey nice post!

Sramana